Will they, won’t they - and would it matter either way? These are the key (yen-related) questions of the day, or indeed, the month.
Japan’s signalled (with slightly more feeling this time around) that it might – really, really might – act to curb yen strength after the currency reached a 15-year high of Y83.60 to the dollar on Tuesday.
On Wednesday, the yen dipped slightly to about Y84.50, after seemingly tough talk from the finance minister, Yoshihiko Noda, about prospects for official intervention.
After days of market speculation about government action, Noda has now incrementally ratcheted up his earlier rhetoric – albeit in typically nuanced Japanese style – from last week’s pledge to monitor the yen “appropriately”.
As one veteran analyst – and wit – in Tokyo pointed out: Noda and other politicians continue to use the word “tekisetsu” to refer to their stance on the yen’s rise. It literally means “appropriate”, as in “appropriate stance”, “responding appropriately” – and pronounced quickly, it can sound like “Texas”.
So while the politicians continue to talk about ‘Texas’, nothing will be done to bring the yen’s rise to an abrupt halt, says the analyst. The key word (or phrase) to watch for, he advises, is “decisive” – sekkyoku kakan. When politicians mention that in relation to the yen, they will probably actually do something.
The factor that nudged the yen down on Wednesday, say observers, was a report in Japan’s Nikkei financial newspaper saying the Bank of Japan was considering further monetary easing.
Analysts took the remarks in their stride. Paul Robson, a currency strategist at RBS, told Bloomberg: “We’re seeing a slight tightening of the intervention rhetoric out of Japan… And it’s only natural that after pushing the yen to extreme levels yesterday, people will pull back and digest the news.”
“Pull back and digest” is probably the key phrase, for once digested, things are likely to continue as before, believe many currency strategists and commentators.
The views expressed in myriad research notes on Wednesday can be summed up as: 1) doubtful that Tokyo would intervene; 2) highly sceptical of the results if it were to do so; and 3) still somewhat bemused at the currency’s seemingly inexorable rise – despite all the logical explanations.
JPMorgan’s Tokyo currency strategist Junya Tanase says official forex intervention is still highly unlikely but if it were to occur, it will have little impact – or could even have the opposite effect to that intended. He notes:
With regards to JPY-selling intervention, we still believe that it’s unlikely even if USD/JPY breaks a post-WWII low at 79.75. Even if the MoF [finance ministry] conducts the intervention against our expectation, we believe that it will not be able to stop JPY appreciation and we will even see a “side-effect” of intervention (meaning an acceleration in JPY appreciation).
Citigroup analysts meanwhile on Wednesday suggested the yen could settle at ¥70/¥80 to the dollar. The turning point, they said, would be a rise in US long-term interest rates, not Japanese policy measures. Possible courses of official Japanese action, in Citi’s view:
… include increasing fiscal spending, monetary easing, or forex market intervention, but we do not think any of these choices would produce a significant result. Were the BoJ to decide on further monetary easing and unilateral intervention in the forex market, we would expect only a limited impact. Some think that the BoJ could inject an additional ¥10trn or so in liquidity, but this amounts to only 0.7% of the ¥1,455trn in broadly-defined liquidity.
Like other analysts, Citi believes that forex market intervention could have significant impact – but only with co-operation from the US and Europe (which is highly unlikely). Otherwise, any unilateral action by the Bank of Japan would make little difference.
In any case, adds Citi, yen appreciation is due not to problems with Japanese economic policy “but rather to a decline in the US long-term interest rate”. It explains:
Year-to-date, the weakest the yen has been versus the US dollar is ¥94.72/$ on April 2. The US long-term interest rate was 3.9% on April 2, while Japan’s was 1.4%, meaning the difference between the two was 2.5ppt. At present, the US longterm interest rate is 2.5%, while Japan’s is 0.9%, so the difference is just 1.6ppt; in other words, the gap has shrunk 0.9ppt in just four months. The all-time high of ¥79.75/$ is just ¥4 or so away, so we do not think it would be that big a deal were the yen to hit a new all-time high versus the dollar. Instead, the market focus is likely to be on whether the yen settles in the ¥70-¥80/$ range.
If you wonder for a moment why the US and Europe would happily let Japan twist as its currency spirals ever-upward, Citi estimates that Japan’s current account surplus will amount to 3.4 per cent of GDP in 2010, compared with deficits amounting to 3.0 per cent of GDP in the US and 0.4 per cent in the eurozone. As it concludes:
We do not expect large-scale cooperative intervention in the forex market unless the yen appreciates rapidly.
As for all that bold talk from Tokyo: as FT Alphaville earlier remarked, citing a Wednesday note from Nomura’s rates team, central banks “just don’t seem to be getting the same, err, market bang for their buck as they used to”.
Neither, it would seem, are Japanese politicians. In the past, remarks such as “we will take appropriate action” from a finance minister or prime minister, would have had instant effect. Today, it barely causes the yen to pause.
As the FT notes in a Wednesday analysis, “verbal assurances from Japanese officials are starting to wear thin”. It adds:
So far, Japanese authorities have relied on mere words to try to stem the rise in the yen. But it has become clear that this tactic, despite being deployed on an almost daily basis from various officials in recent weeks, is beginning to lose its effectiveness.
Too much more of this, and we will have to recommend Japan’s leaders to take “The Boy Who Cried Wolf” to bed with them for night-time reading.
Related links:
A yen for bonds in ‘upside down’ financial world – FT Alphaville
A yen for intervention? – FT Alphaville
Tokyo’s FX traders keep calm and carry on – FT Alphaville
BoJ sees few ways to lift demand – NYT