Those yen-intervention rumours are flying, fuelled by reports of discreet phone calls between the Japanese PM’s office and the Bank of Japan, not-so-discreet complaints from captains of Japanese industry and dire warnings from economists.
That’s not to mention the recent – and rather mystifying – pledge by Japan’s finance minister of “appropriate action” on the strong currency.
On Tuesday, however, it was all looking a little more serious, as the yen reached a 15-year high against the dollar of Y84.17, prompting Japan’s prime minister Naoto Kan to weigh in with the grave observation that “steep currency moves are undesirable” (err, yes, wakarimashita, Naoto…).
Even the country’s top trade union leaders, as Bloomberg reports, got in on the act, urging co-ordinated action by Tokyo and other G7 governments and central banks to stabilise the yen.
Needless to say, perhaps, that no amount of jawboning so far has been able to seriously dent the ‘teflon yen’.
Some observers attribute the recent stalemate in dollar-yen trading – which seemed stuck in the Y85-Y86 range – to a rise in yen-selling by Japan’s over-active retail investors trading on margin: the “Mrs Watanabes” that the FT descrbes as “fearless women speculators”.
But make no mistake, says Nomura strategist Yunosuke Ikeda, “this is not the work of Mrs Watanabe” – nor of her day-trading colleagues and friends. Yen-dollar trades have mostly been contrarian and even the approximately Y400bn ($4.75bn) in net dollar/yen buying in June failed to curb the yen’s appreciation, he says in a Tuesday note, adding: (our emphasis)
If JPY selling by these investors is not the cause, then in our opinion the range-bound market was primarily due to the stability of Treasury yields. In this case, volatility could rise sharply in the near term if important US data releases defy market expectations to the extent that interest rates fluctuate.
It’s certainly true that yen short positions against the eight major currencies in the Tokyo Financial Exchange have reached a record high of Y457bn. But it’s unlikely that Mrs Watanabe’s FX position can have much effect in curbing the yen’s rise against the dollar, according to Ikeda:
First of all, the amount invested is not very large. USD/JPY positions in TFX are in the tens of billions of yen, even on a day with large turnover. This would be about JPY100-200bn, even including OTC trading.
Moreover, this is short-term trading, so it would not necessarily weaken/strengthen JPY over the long term. Of course, net USD/JPY positions including OTC trading could amount to several hundreds of billions of yen in a single month. For example… net USD selling amounted to JPY752bn in March and net USD buying totalled JPY399bn in June. USD/JPY rose in March (88.97 to 93.47) and fell in June (91.26 to 88.43), highlighting these investors’ contrarian approach.
This may have neutralized market momentum to some extent, but the argument that their presence led to the market’s current stalemate just does not hold with us. No matter how much Mrs. Watanabe tried, her trading was not enough to halt JPY appreciation in June.
Nomura, at least, believes that fundamentals are driving the current yen-dollar relationship – specifically, the stability of Treasury yields. Concludes Ikeda:
Given this, we believe the positioning of speculative investors typically seen in Chicago IMM, who are sensitive to the yield outlook, has remained largely unchanged. Moreover, with USD/JPY at around 85, some financial institutions have constantly bought USD on the assumption that it is at an historical low. That said, if Treasury yields begin to move in response to key indicators – such as US housing indicators, the ISM manufacturing index and employment statistics – USD/JPY volatility could escalate significantly.
Provided, he says, that market expectations of Japanese central bank and finance ministry actions to curb the yen keep fading, the downside risk for dollar/yen could rise in the near term.
Anyway, says JPMorgan currency strategist Tohru Sasaki – a former BoJ-er – forget about yen intervention if you want to see action. It simply doesn’t work, he says in a recent note:
There is no historical case in which JPY selling intervention succeeded in immediately stopping the pre-existing long term uptrend in JPY.
He notes: 1) the dollar/yen rate continues to fall during the period of intervention and stops falling only after intervention is halted; 2) yen-selling intervention leads to increased speculative buying of the currency; 3) Japan’s policy makes unsterilised intervention impossible; even the combination of FX intervention and the BoJ’s monetary easing proved to be ineffective
It’s worth noting, Sasaki adds, that the Japanese government is stuck with more than Y100,000bn in yen-carry positions, left over from its extensive intervention in the past. The returns on that are “shrinking sharply amid a fall in US yields”, with unrealised losses amounting to close to 30 per cent of Japan’s total foreign reserves.
The fundamental problem behind the medium to long term trend of yen appreciation is Japan’s deflation – and any attempt to move the gargantuan dollar/yen market with superficial policies “will only be futile”, in Sasaki’s view.
Yen-selling intervention therefore is unlikely – and even if Tokyo does plunge into it, the dollar/yen rate can be expected to breach the currency’s post-war level of Y79.75, he concludes.
Well, as Lex recently noted, intervention certainly isn’t what it used to be….
Related links:
A yen for intervention? – FT Alphaville
How to say ‘appropriate action’ in Japanese – FT Alphaville
BoJ governor on the yen – Money Supply
Tokyo’s FX traders keep calm and carry on – FT Alphaville