Just when every other country appears to be racing to devalue its currency, the poor Japanese yen just can’t stop strengthening. Its rise against the euro Monday was accompanied by a splurge of bad news, including Sony’s likely first operating loss in 14 years and Toshiba’s first in seven years. Furthermore, Japanese bankruptcies were up 24 per cent in the year to the December. The Nikkei resoponded by declining more than 4 per cent.
All in all, the yen’s recent major ascent will undoubtedly be troubling the authorities.
So the big question is, just how will they respond? Many are expecting only one thing, that Japan too will be forced to join the devaluation bandwagon.
The strong yen is already having a very nasty effect on the economy- exporters like Sony and Toshiba being hit a case in point.
As Neil Mellor at Bank of New York Mellon puts it (emphasis ours):
So, with Q4 GDP data set to reveal what is likely to have been the sharpest economic contraction in 34 years and with pension funds looking set to book large and growing losses as the financial year-end looms, the political and economic imperative for immediate and draconian action is growing. Although the relationship is far from perfect, charting USD/JPY alongside the Nikkei shows that Japan’s strong currency is playing a particularly damaging role and increasingly so given that the JPY crosses — including the KRW/JPY cross — are once more in retreat. (Should this continue, then the JPY will soon threaten multi-year, and in some cases, multi-decade highs against a wide number of currencies).
For the moment, verbal intervention remains MOF’s preferred weapon to address this trend (see Headlines); but Mr Nakagawa needed little reminder from the currency markets today to be aware of the futility of this option without the realistic accompaniment of its physical counterpart.
Mellor’s conclusion is that while direct intervention to weaken the yen cannot be ruled out, it’s unlikely to be the favoured option – being politically sensitive and unable to guarantee success. As a result the MOF will have to lean on the BOJ, getting it to turn on its printing presses too.
However, as Mellor points out:
Whether this would succeed is another matter; but if the LDP and the finance ministry are indeed at desperation stakes, then a strategy of growing, political pressure for immediate action appears to us to be inevitable.
Dennis Gartman of the Gartman Letter is equally concerned, especially as yen strength once again begins to test multi-year highs. Unsurprisingly he comes to a similar conclusion:
We are somewhat…no, we are greatly… surprised that the authorities in Japan have not moved to intervene against the Yen, for the damage being wrought upon Japan’s exporters is very, very real indeed.
We must needs consider the very real possibility of intervention sooner rather than later, for Japan’s authorities are disposed to such action if the past is prologue. Further, we shall once again remind our clients that despite the warnings that intervention never works, that is simply not true.
Intervention to support one’s home currency rarely works, and indeed really cannot work, for a weak currency is the end result of horrid policies. The authorities are always and everywhere swamped by those wanting to sell the currency in question. But intervention to weaken one’s home currency is another story entirely, for then the authorities have an unlimited supply of “ammunition” at their disposal. They can, if they wish, create an unending supply of Yen, in this case coming at the buyers again and again and again until all buying is sated and selling begins:
So there you have it – expect another devaluation policy about to begin imminently (that’s to join Russia’s, the UK’s, the ECB’s, the Fed’s, New Zealand’s …)
Of course if everyone devalues at the same time, the overall impact is likely to be negligible. Hence, it’s a clear race to the devaluation line, with the BoE and Russia currently leading the pack.
Related links:
Psssst, anyone want a JGB? – FT Alphaville
Talking down sterling – FT Alphaville