SINGAPORE, July 31 - Japanese and South Korean authorities intervened in the foreign-exchange market to purchase their own currencies in a move described by market participants as both rare and coordinated, and which may have included U.S. involvement. The intervention late on Thursday eased the yen away from the 40-year lows it had been trading near this week, while the Korean won strengthened sharply at the same time.
Trading activity after the intervention showed markets probing Tokyo's willingness to sustain its action, as the Bank of Japan opted to keep policy rates unchanged at 1% on Friday. The yen had staged a rebound as strong as 157.8 to the dollar during the intervention, before settling later around 160.64 per U.S. dollar - roughly 0.7% softer on the day from that later level.
The won moved in tandem with the yen's recovery. It firmed about 2% during the episode, reaching its highest level in nine months, and was last reported at approximately 1,437.62 per U.S. dollar on Friday. That follows an extreme trough earlier this year when the won touched a 17-year low of 1,561.50 per dollar last month.
A market source said South Korea's foreign-exchange authorities carried out a rare dollar-selling intervention as part of the coordinated effort. Analysts note the close coupling of the two East Asian currencies, and say joint action can amplify the market impact.
"The interests of each country aligned. For Korea-Japan cooperation, the won and the yen are so tightly coupled that a joint intervention could double the impact," said Lee Min-hyuk, an analyst at KB Kookmin Bank. He added that from a U.S. vantage point, there is a desire for Korea and Japan to deploy capital into America, and with exchange rates having been exceptionally high recently, the United States likely preferred a lower exchange rate.
Japanese media reported that Tokyo likely executed substantial yen-buying operations and that U.S. authorities performed rate checks. Market participants said the intervention raised the stakes for the BOJ meeting as investors weigh whether the central bank will be prepared to lift borrowing costs further to counter currency-driven inflation risks.
Observers pointed to the intervention as a signal that Japan's finance ministry remains worried about excessive yen weakness. "The key signal from last night’s move is that Ministry of Finance remains uncomfortable with excessive yen weakness," said Masahiko Loo, senior fixed income strategist at State Street Investment Management.
Analysis of past activity shows Japan has intervened in currency markets both in coordination and alone. According to an analysis by currency strategist and trader Brent Donnelly at Spectra Markets, Japan has acted in concert with the U.S. or other G7 partners on five occasions since 1985 and has carried out eight solo interventions. That historical record indicates most joint operations coincided with a reversal in the dollar/yen trend.
Market dynamics in South Korea also contributed to the won's strength this month. The currency has appreciated nearly 8% in the month to date, supported by firms repatriating U.S. dollars back into South Korea. One notable corporate move involved SK Hynix, which raised $26.5 billion in a U.S. offering earlier this month; a market source said the company converted part of the proceeds from its American depositary receipts offering into won.
KB Kookmin Bank's Lee noted that the timing of these flows, combined with Japan's intervention to shore up the yen, likely provided South Korean authorities with an opportunity to press their exchange rate lower and counteract the market's elevated expectations for a persistently high dollar-to-won rate. "People were questioning whether the exchange rate would rebound once the ADR ended," he said. "As the ADR concluded and Japan intervened to support the Yen, our authorities probably used this opportunity to push the rate down and break the market’s high exchange rate expectations."
With central bank communications now in focus, markets will be watching comments from the Bank of Japan to gauge whether authorities plan to continue raising borrowing costs in response to currency developments and other economic signals. The intervention has reintroduced official action as a force in currency markets and suggests policymakers are prepared to step in when exchange-rate moves are judged excessive.
Key points
- Japanese and South Korean authorities conducted a rare coordinated currency intervention, buying their own currencies in the open market, possibly with U.S. involvement.
- The intervention pushed the yen off its 40-year lows and coincided with a roughly 2% firming of the won to a nine-month high, amid recent corporate repatriations such as SK Hynix conversions.
- The BOJ kept rates at 1% on Friday, shifting focus to central bank commentary and the possibility of further rate increases to address currency-driven inflation risks.
Risks and uncertainties
- Markets may continue to test Tokyo's resolve, creating volatility around the yen and influencing import-sensitive sectors such as manufacturing and machinery.
- Repatriation flows and large corporate conversions into won could reverse, leaving the won exposed to renewed weakness and affecting exporters and supply-chain cost structures.
- Uncertainty over whether central banks will raise rates quickly enough to counter currency moves adds risk for fixed income and financial markets as investors reassess policy trajectories.