Japan on Thursday took the unexpected path of raising its borrowing limit for foreign exchange intervention — the first time in six years, according to Reuters.
Some reports interpreted the move as a signal the country might be unhappy with the current strength of the yen.
BNP Paribas’ FX team, however, begged to differ. As they noted, Japan hasn’t intervened since 2005, and was unlikely to do so now:
Japan has filled its war chest with funds ready to intervene. Under its fiscal 2010/11 draft budget, Japan will raise its borrowing ceiling for its foreign exchange special account, the war chest for yen-selling currency intervention, by JPY 5tn (USD 56.5bn) to JPY 145tn, the first increase in 6 years, stirring talk that the government may be signalling its willingness to intervene if needed to limit JPY strength.
The last rise in the borrowing ceiling was in April 2004, when it sold more than JPY 30tn. Japan finances its currency intervention by issuing shortterm government bills.
The outstanding amount of such bills is estimated to reach JPY 110.4tn at the end of this month, meaning the government could have issued another JPY 30tn in bills to fund intervention, had it wanted to sell yen, even without raising the ceiling from the previous limit of JPY 140tn.
However, Japan has not intervened in forex markets since spring 2005, thus markets are not willing to put too much emphasis on Japan increasing its intervention war chest, hence USDJPY and EURJPY are likely to remain on the back foot today targeting 87.50 and 119.20 respectively.
The move lower of JPY crosses will be supported by falling bond yields coming on the back of the release of the Fed’s Beige Book, the Institute of International Finance (IFF) warning that any early removal of quantitative easing may push interest rates higher and the housing market into a renewed crisis (see FT article on the this topic).
US labour market releases were mixed, wit the ADP private sector employment report revealing some downward revisions added to worries. Nonetheless, we would not underestimate Japan’s government intention to intervene as there is growing unease regarding the country’s competitive position against Korea and China, mainly related to the JPY’s past appreciation trend. Hence, we suggest using lower USDJPY and EURJPY levels creating cross JPY long positions.
Other traders agreed. While the issue of competitive devaluation in Japan remains a possibility, one unnamed dealer told Reuters a 5,000bn yen manoeuvre in that context would hardly be a significant move.
Related links:
A yen for liquidation? - FT Alphaville
Exporters hope for yen boost – FT
How do you say competitive devaluation in Japanese? – FT Alphaville