Tokyo Runs Out of Currency Manipulation Room

The Japanese Yen has been defended by Tokyo against a strong US Dollar for several months now. The last week saw the USD/JPY pair stall shy of 164.00, with some questioning whether Japan simply cannot afford to defend its currency. However, recent data suggests that money was never the constraint.

Japan holds foreign exchange reserves of roughly $1.3 trillion, second in the world only to China. Around $1.1 trillion of this sits in foreign securities, mostly US government debt, which cannot be liquidated at speed without disturbing the bond market and crystallising losses.

The practical war chest is the foreign currency held on deposit at the central bank and at other central banks, somewhere between $150 billion and $180 billion. This, combined with a standing swap line with the Federal Reserve worth up to $120 billion more, has led one strategist's arithmetic to put that at roughly 32 more interventions.

However, Tokyo is running out of something less negotiable: room for maneuver within the classification as a freely floating currency by the International Monetary Fund (IMF). Analysts counting the budget in early May reckoned two more operations were available before November without the country losing the label.