Japan Intervenes To Support Struggling Yen: Why Did It Trigger Nikkei 225 Futures Dip? 4 Charts To Watch (CORRECTED)

Editor’s note: The headline and body of this story have been corrected to specify the price action was in Nikkei 225 futures.

The Bank of Japan (BoJ) intervened in the foreign-exchange market on Monday to bolster the weakening Japanese yen, which had plunged to a 34-year low of 160 per dollar.

In response to the move, the yen saw a notable recovery, jumping as much as 3% to 154.6 against the dollar following the intervention, before retracing to 156.80 at the time of this writing.

Chart: Dollar-Yen Tumbles After BoJ Intervenes In FX Market

Why Did The BoJ Intervene?

In response to the Japanese yen depreciating by over 10% in less than four months in 2024, Japanese monetary authorities decided on Monday to take actions to stabilize the domestic currency’s value.

These interventions are typically ordered by the Ministry of Finance, as officials believe that sudden and disorderly fluctuations in exchange rates can have adverse financial consequences.

The yen had experienced depreciation in six of the previous seven weeks, reaching as low as 160 against the dollar, prompting the Bank of Japan to deploy countermeasures.

Foreign exchange interventions involve the sale of foreign exchange reserves in exchange for domestic currency to support its value.

The last time Japan intervened in this manner was in October 2022, when the yen had fallen to around 152 per dollar, with an estimated expenditure of approximately 9.2 trillion yen ($60.78 billion) to defend the currency.

The primary culprit behind the yen’s deterioration is the contrasting monetary policies between the Federal Reserve and the Bank of Japan.

Despite the Japanese central bank’s rate hike in March—ending a 14-year period of zero or negative interest rates—the increase was not only modest, at just 10 basis points, but the BoJ also provided no clear indications of future rate adjustments.

This tentative approach failed to reverse the yen’s downward trajectory.

Simultaneously, higher-than-expected inflation data in the United States led market participants to revise down their expectations of future rate cuts by the Fed, further widening the policy gap between the two countries and exerting pressure on the yen.

As the chart below shows, the dollar-yen rate reflects the flip side of the yield differential between 10-year U.S. Treasuries and Japanese bonds.

Chart: USD/JPY vs. 10-Year US-Japan Yield Spread

Impact on Japanese Equities

The Bank of Japan’s intervention in the foreign exchange market resulted in a decline in the dollar-yen exchange rate, which in turn negatively impacted futures on the major Japanese stock market index.

Futures on the Nikkei 225, which comprises 225 large-cap Japanese companies, experienced a 0.8% decline from midnight to 10 a.m. EDT on Monday, while the dollar depreciated by 1.6% against the yen during the same period.

Chart: Nikkei Index Falls After BoJ FX Interventions

Japanese stocks in the Nikkei 225 typically benefit from a weaker yen, as domestic companies become more competitive in international markets, potentially boosting the value of their exports.

This phenomenon particularly benefits industries heavily reliant on overseas sales, such as automotive and electronics sectors, which are prominent components of the Nikkei 225.

For instance, leading Japanese automakers like Toyota Motor Co. TM stand to gain from a weaker yen as it lowers the cost of their vehicles in foreign markets. This, in turn, can stimulate demand and bolster sales volumes, ultimately translating into higher revenues and improved profitability for these companies.

Analyzing the relationship between Toyota’s stock performance and the dollar-yen exchange rate over the past year reveals a notable correlation. As the dollar strengthened relative to the yen, shares of Toyota tended to exhibit upward momentum, reflecting stronger investor optimism about the company’s competitive position in international markets.