TOKYO Reuters-Japanese intervened in the currency market on Thursday to buy yen for the first time since 1998, in an effort to shore up the hard-hit currency after the Bank of Japan stuck with ultra-low rates.
Below are details on how yen-buying intervention works as well as the challenges to that effort.
Japan has taken a hands-off approach to yen falls because of the economy's heavy reliance on exports.
It's very rare that yen-buying intervention has been very rare. The last time Japan intervened to support its currency was in 1998 when the Asian financial crisis triggered a yen sell-off and a rapid capital outflow from the region. Before that, Tokyo intervened to counter yen falls in 1991 -- 1992.
Currency intervention is costly and could easily fail due to the difficulty of influencing its value in the huge foreign exchange market.
It is one of the reasons why Tokyo greenlights it only when verbal intervention fails to prevent a free fall in the currency. The speed of yen declines, not just levels, is seen as a major factor in the decision on whether and when to step in.
Some policymakers say that intervention only becomes an option if Japan faces a triple threat -- selling of yen, domestic stocks and bonds -- in what would be similar to the capital outflows experienced in some emerging economies.
When Japan intervenes to stem yen rises, the Ministry of Finance issues short-term bills to raise yen, which it can sell in the market to weaken the Japanese currency's value.
In cases of intervention to prop up the yen, the authorities must tap Japan's foreign reserves for dollars to sell in the market in exchange for yen.
The finance minister will issue a final order to intervene. The Bank of Japan will act as an agent and execute the order in the market.
Yen-buying intervention is more difficult than yen-selling.
Japan's foreign reserves are at $1.33 trillion, the world's largest after China's and likely composed mostly of dollars. If huge sums are required to influence rates every time Tokyo steps in, reserves could quickly dwindle.
That means there are limits to how long it can keep intervening, unlike for yen-selling intervention - where Tokyo can continue issuing bills to raise yen.
Currency intervention would also require informal consent from Japan's G 7 counterparts, notably the United States, if it were to be conducted against the dollar yen. It is not easy to disagree with Washington, who is traditionally opposed to the idea of currency intervention except in cases of extreme market volatility.