kuroda meme 1

In light of today's intervention from the Japanese Ministry of Finance, it's important to remember that there are two types of currency intervention: To weaken a currency and to strengthen one.

That's a big difference.

If you want to weaken your currency, all you need to do is print it and sell it. There's no limit to how much you can print, you simply accumulate huge amounts of foreign assets.

Strengthening a currency isn't so straight forward. Your ammunition is limited by your foreign reserves. Japan has $1.3 trillion in FX reserves so it's got ammo. But there's still a limit.

Japan FX reserves

In general, Japan will be relying on signaling rather than firepower to start. I'd be surprised if they spent more than $10 billion today but the philosophy is essentially: Walk softly and carry a big stick.

What they relied on to cap USD/JPY at 145.00 initially was bluffing on intervention. Now they've delivered.

At the same time, the job is getting progressively harder. The BOJ left monetary policy unchanged today while everyone else hiked. US 10-year yields are now up 19 bps on the day to 3.70% while Japanse 10 years barely yield 19 basis points in total.The natural outflows from Japan are overwhelming.

So I expect the BOJ to be continually tested and it's clear that 145.00 is the line in the sand. So I suspect we probe that periodically so long as the mood in markets remains the same.

Of course, the hammer lies with the Bank of Japan. If currency weakness manifests inflation (how can it not?) then they will pivot to something more hawkish. That would be a total rug pull on the JPY trade.