Will they, or won’t they? First it was Japanese government bonds, now it’s the yen, which strengthened on Friday to a 14-year high against the dollar, climbing past Y85 amid speculation that Japan would intervene in markets.
As Reuters reports on Friday:
Japan’s finance minister raised the prospect of a G7 joint statement on currencies to cool the yen’s rally as the dollar tumbled to a 14-year low against the yen on Friday. In a sign Tokyo was stepping up its warnings of the chance of currency intervention, market sources said the government and the Bank of Japan had been checking dollar/yen rates with commercial banks in the morning.
The greenback slumped to a low of 84.82 yen as investors shunned riskier assets due to concerns about Dubai’s debt problems, but it pared its losses after comments by Finance Minister Hirohisa Fujii. “I would respond flexibly to a joint statement on currencies,” Fujii told reporters after a cabinet meeting.
Fujii said he was also flexible about contacting currency authorities in the US and Europe, adding that he was very nervous about currency moves and it was possible Japan “could respond” [Our words: Japan-speak for "we are thinking of acting to stabilise the yen"]. He declined to comment on intervention, saying he was not in a position to use the word due to commitments with other G7 countries on currency flexibility. Traders doubted if Fujii’s comments were strong enough to reverse the greenback’s slump, as joint intervention seemed unlikely.
This from a minister who, as FT Alphaville noted in October, was only relatively recently warning that currency intervention could “destroy a free economy”.
But, in a style that is becoming disturbingly typical of the new government, the latest signals suggest that the yen’s rise — or rather, dollar weakness- – and accompanying complaints from Japan’s key exporters are seriously rattling the government. It also suggests that phone lines are running hot between Tokyo and other G7 finance ministries.
In the view of CMC Market’s Ashraf Laidi, the “yen’s perfect storm” erupted amid the combination of unexpected decline in Japanese unemployment and falling global equity futures following the Dubai fallout.
But the signals “were all there”, he says in a Friday note – not least from the changing face of the carry trade, whereby the dollar had replaced the yen as the main funding currency of such trades (“courtesy of the Fed’s dovish rhetoric), especially after dollar 3-month LIBOR fell below its JPY counterpart in August, for the first time ever in August”.
The yen’s diminishing role as a funding currency was also a result of the Bank of Japan’s announcement to end purchases of corporate debt by year-end, he adds.
The last time the G7 issued a statement on currencies was in October 2008, when it warned that yen volatility threatened financial stability after the Japanese currency surged to a 13-year high against the dollar and a six-year peak against the euro. Now, currency strategists and commentators are saying that the G7 or even the G20 could issue a joint statement to prevent the dollar from weakening further.
For Japan, the currency’s inexorable rise is something of a political as well as economic problem. The yen has risen 5.3 per cent since the end of 2008 and is now raising fresh headaches for the fledgling Hatoyama government, which is struggling with other challenges on the fiscal front as well as increasing concerns about the impact of the strong yen on the country’s export industries.
Currency intervention is a sensitive issue for this administration, as Hatoyama’s DPJ when in opposition criticised the previous LDP administration for pandering to exporters by keeping the yen weak.
But according to Laidi, Tokyo should look to the Fed:Aside from threatening at co-ordinated intervention action (central banks selling the yen), Japanese officials can take a page from the Federal Reserve and resort to fresh liquidity injections. One way would be for the Bank of Japan to reverse last month’s decision that it would halt purchasing corporate debt beyond year-end. Markets must also be aware of the emerging rift between the Japanese Ministry of Finance (new political power), criticizing the Bank of Japan (appointed & approved by LDP) and the central bank’s rosy forecasts. Thus, Japanese bureaucrats may continue talking down the currency, but as long as the BoJ remains insistent on gradually exiting its strategy of emergency liquidity measures & issuing brighter economic outlook, yen downside would remain limited — especially if the Dubai Debt fallout is accelerated in world bourse via year-end profit-taking.
The chances of a successful yen-selling intervention, however, (ie, success = prolonging yen weakness) would largely depend on officials’ ability to stabilise falling world bourses, rather than the volumes of actual yen selling, he says, adding:
Thus, it would be irresponsible to assume that yen-bound FX flows (new speculative yen longs & unwinding of yen shorts) be halted at a time when risk appetite has been violently shaken by a “new source of event risk” (Dubai fallout rather than the usual suspects of weak US macro, US/UK banks or Eastern European banks).
The Economist, meanwhile, in its latest issue examines Japan’s deflation problem and urges Tokyo to stop prevaricating on the issue of extra stimulus spending. “If the consequence of all this additional stimulus is a weaker yen, so be it. It will be a small price to pay if the eventual result is more openness and buoyancy in one of the world’s largest economies”.
And therein, perhaps, lies the answer to Japan’s latest problems – spend more, weaken the yen and face the consequences.
Related links:
Yen rises to 14-year high on risk aversion, stock losses – Bloomberg
Japan prepared to sell yen to keep currency below 14-year-high – ZeroHedge
The JGB murders – a novel and illuminating take on JGBS - FT Alphaville
More fun with JGBs, more headaches for Japan – FT Alphaville