Why The BOJ May Not Intervene To Brake the Yen's Surge

The yen hasn't been this strong since 1995, and the sharp upward movement in JPY versus USD of late is cause for concern in Japan, as expressed by Finance Minister Fukushiro Nukaga's concern that recent JPY forex movements are "excessive and Prime Minister Fukuda's warning that the JPY surge against the USD is "not desireable".

Yet Finance vice-minister Shinohara said earlier that current circumstances are different than in 1995 and during past interventions in 2003/2004. Regarding what is different than in 1995, this time the JPY is weak only against the USD, and is actually still near 20-year lows in terms of real effective rates against a basket of currencies. Consequently, we agree with Eisuke Sakakibara, ex-"Mr. Yen" of Japan's finance ministry, when he says that;

1) intervention by the BOJ on behalf of the MOF is unlikely at current levels, because even JPY85/USD equates to JPY110/USD a decade ago. To get to similar inflation-adjusted levels of a decade ago, JPY would have to move to the JPY70/USD range.
2) He does not believe that the US would approve such an intervention.

There may be another fiscal reason. The Bank of Japan (at the direction of the Finance Ministry) creates yen funds for US dollar buying/yen selling by issuing special Finance Bills that are counted as part of Japan's government debt. For example, Japan now has some JPY838 trillion of bonds and borrowings outstanding, or roughly 1.7X GDP. Outstanding Financing Bills(mainly for forex intervention) account for roughly 12% of this. In addition, Japan has been generating consistent gains on its holdings of mainly US treasuries, to the point they are able to transfer several trillions of yen back into the general budget account from gains made on foreign exchange holdings, thereby helping to fund a chronic fiscal deficit.

Thus while Japan has massive foreign exchange reserves of USD979 billion, these are mainly in USD whereas they need to issue new FBs (debt) to intervene by selling yen to brake a very rapid rise.