Japan’s Ministry of Finance (MOF) has finally entered into a campaign of unilateral intervention to fight the rise of the Japanese yen.
Here is a short analysis of what the Japanese authorities have done, its impact, what they will do next, the international impact and whether they will be successful.
• What have they done? Japan’s Finance Minister, Yoshihiko Noda, has confirmed that the authorities had intervened unilaterally, although they had, as would be expected, communicated with authorities overseas. The Nihon Keizai Shimbun reported that the intervention would likely be left “unsterilized,” which is something that Bank of Japan sources are also saying is likely. Bank of Japan’s decision of “not sterilizing” today’s action of “selling” the yen will increase the money supply.
Remember, the decision on sterilization is always taken when the trades settle. (Editor’s Note: Sterilized intervention is commonly defined as requiring offsetting intervention with the buying or selling of government bonds, while unsterilized intervention involves no changes to the monetary base to offset intervention.)
Dow Jones cited traders as saying that the MOF had likely sold around 1 trillion yen ($11.7 billion). The impact so far has been to drive the dollar up around 2.75 percent as of 6 a.m. Eastern time.
Previous intervention days where the MOF sold in excess of 1 trillion yen and the dollar’s net percentage move higher seen on the day:
• April 3, 2000 (1.385 trillion yen): up 2 percent
• Sept. 21, 2001 (1,287 trillion yen): up 0.2 percent
• May 19, 2003 (1.040 trillion yen): up 0.8 percent
• Sept. 12, 2003 (1.018 trillion yen): up 0.2 percent
• Sept. 30, 2003 (1.067 trillion yen): up 0.6 percent
• Dec. 10, 2003 (1,284 trillion yen): up 1.2 percent
• Jan. 9, 2004 (1,666.trillion yen): up 0.4 percent
• March 5, 2004 (1,245 trillion yen): up 0.9 percent
• What is its impact? If the estimates are true, then this would make today one of the larger intervention days in history. Checking back since the start of the new millennium, we can only find eight days when the authorities sold more than what is listed above.
It is also worth noting that the rally seen so far today has exceeded that of those other days, although there have certainly been several days in history when USD/JPY has made larger moves to the upside. In this context today’s intervention could be deemed a “success.”
• What they will do next? What the MOF does today is critical as it is by this that they will be judged.
If the move isn’t deemed to have been sufficiently threatening and it is worth remembering that USD/JPY is still only slightly above where it was on the last day of August, then investors and, presumably, Japanese exporters will feel comfortable renewing their purchases of the Japanese yen as we can assume that many had been waiting for the MOF to step in before buying Japanese yen anyway. Therefore, the Japanese authorities need to make today’s move as painful as possible.
• What is the international impact? There is, however, another constituency that the authorities need to consider: their G-7 and G-20 partners. They will remember that their attempts to actively drive the Japanese yen lower back in 2004, rather than simply smoothing its upward path, ended up eliciting critical comments from overseas and in particular from then Fed Chairman Alan Greenspan.
Not only would this prove embarrassing, such criticism would run the risk of also undoing the work that they had already done. In other words, the MOF can only afford to drive the Japanese yen so low over a series of days before criticism will likely start to emerge, particularly given the heightening tensions over currency policy in the past few weeks.
So far, other central banks and finance ministries have studiously avoided commenting on Japan’s actions.
It is interesting, however, to also note that the Swiss National Bank (SNB) apparently didn’t use today’s move by the Japanese as an opportunity to drive the Swiss franc (CHF) lower at the same time, notwithstanding the Swiss franc (CHF) has, of course, also been a beneficiary of safe-haven flows this year.
• Will they be successful? In the short term the answer is “yes.” I would certainly not stand in their way today.
However, it must also be noted that the authorities aren’t fighting speculative forces here and that the flows into the Japanese yen are being driven by external events rather than by anything within Japan.
As proof of the former, we have seen accelerated buying of Japanese government bonds by China through all of this year and particularly through May, June and July.
As proof of the latter, we note that the Japanese yen-strengthening trend emerged quite specifically from May 5 onward. This was the day that EUR/USD collapsed below $1.30 for the first time as the eurozone teetered on the brink.
Tellingly, the Japanese yen continued to gain ground through May as investors continued to flee the eurozone peripheral bond markets despite the support of the European Central Bank (ECB) and, indirectly, the Swiss National Bank (SNB).
The Japanese yen strengthening trend continued on through June as the problems facing the U.S. economy also became all too apparent and talk of Quantitative Easing (QE) began to circulate once again. In other words, the buying of Japanese yen has been driven by a marked decline of faith in both the dollar as well as the euro as “stores of value.”
Finally, I think fighting this for now is harder than simply taking on speculative players in the market.
As a result, although today I would prefer stepping aside to see how low the Japanese Ministry of Finance can drive the Japanese yen, I think it’s probable to suspect that renewed Japanese yen buying will emerge as investors look to take advantage of the artificially cheap prices offered to them by the Japanese authorities.
We’ll see what will happen.
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