Here’s some suggested bedtime reading for Japanese officials, who might be wondering why the more vociferously they threaten action to curb the yen’s growing strength, the more underwhelming are the results.
The old Aesop fable of the “boy who cried wolf” could, in fact, be a modern parable — all in nice bureaucratic speak — about the interminable threats of “appropriate action” emanating from Tokyo — the latest being a classic double-header from Masaaki Shirakawa. The Bank of Japan governor told a press briefing on Monday night that the BoJ would “take appropriate steps at the proper time” and went on to say that “the current pace of outright government bond purchase is the most appropriate”.
Given Tokyo’s latest official rattle of the monetary samurai sword — a “firm” (as wobbly tofu) statement on Tuesday by Japan’s deputy finance minister Motohisa Ikeda, of official resolve to curb the yen’s rise — consider this observation from a veteran Tokyo-based financial analyst:
Picking up on the Japanese media’s use last week of the phrase is “tsui-ka kan-wa” — meaning “additional (quantitative) easing” — in reports about possible BoJ action, he noted:
Unfortunately, politicians continue to use another word to describe what they are doing about the yen’s rise: “tekisetsu” – spoken quickly, it sounds like they are talking about “Texas”. “Tekisetsu” literally means “appropriate”, as in: “appropriate stance”; “responding appropriately”; “at the appropriate time an appropriate person will give appropriate instructions” [which really was what the chief cabinet secretary Sengoku said last week to the media, according to the Nikkei].
As long as politicians continue to talk about ‘Texas’, nothing will be done to bring the yen’s rise to an abrupt halt”, he said, noting that the key word to look out for is “decisive”:
When politicians start talking about taking “decisive” (sekkyoku kakan) action on the yen, it means they are about to actually do something. Trust me. Been there, heard ‘Texas’ talked about so many times in the ‘90s, it’s like listening to a “Blast from the Past” Golden Oldie on the radio.
Up to now, the markets seem also to have taken that view, responding with an occasional uptick at official jawboning about “appropriate action” on the yen before reverting to their downward trajectory.
On Tuesday, despite a string of developments including the Bank of Japan’s Monday emergency meeting and move towards further easing; Ikeda’s latest threats of yen action; Prime Minister Naoto Kan’s announcement of Y920bn ($10.9bn) in stimulus measures; and some positive figures on Japan’s July industrial production and retail sales, the Nikkei 225 stock average plunged 3.6 per cent.
The most striking failure however, as Lex noted, lay in the BoJ’s move:
Shirakawa-san should have stayed for the cocktails. By cutting short his jolly to Jackson Hole to call the latest in a series of unscheduled monetary policy meetings, the governor of the Bank of Japan aimed to puncture the yen while igniting loan growth. On both counts, he looks to have failed.
Analysts widely agree that Japanese officials should cease and desist from increasingly unsuccessful attempts at verbal intervention — and perhaps read their Aesop. Beyond that, there’s something of a divergence in views about whether Tokyo should make good its threat to directly intervene on the yen.
Here’s a sampling from some of the savviest analysts following Monday’s BoJ moves. As one observer noted, Y10,000bn ($118bn) — the amount by which the Bank expanded its special loan facility for banks to Y30,000bn — is “not an insignificant amount”, but the yen’s further climb to Y84.36 per dollar on Tuesday and the stock market’s response said it all.
In fact, ventured one analyst, “it’s like turning a fire-hose on to a flooded river in order to help the flow… it doesn’t increase loan demand, it doesn’t reduce the credit risk to the banks, and it isn’t targeting anything”.
Much more useful, he suggested, only half-joking, would be to “introduce negative interest rates via a mandatory charge of Y1,000 per month for any individual with a bank account in Japan, Y10,000 per month for SMEs, and Y100,000 per month for major corporates: that would soon get the cash out of the banks and transferred into other assets (such as mattresses, perhaps, in the case of Mrs Watanabe …)”
Richard Jerram at Macquarie Securities, meanwhile, told FT Alphaville:
The BoJ continues to play the same old game of making incremental but ultimately meaningless policy changes in response to political pressure. Basically, the government seems to have ruled out every option apart from forex intervention. So, yes I think they should intervene on the currency, rather than do nothing at all. To me, it’s a second-best approach – they would be better off trying to take domestic measures, like structural reform and a helicopter money drop - and that would send the yen lower anyway. Okay, so forex intervention is ‘beggar thy neighbour’ but the US and Europe already have indirect beggar-thy-neighbour monetary policy, so Japan action would be just a means of countering.
As for the BoJ: CLSA strategist Christopher Wood told Tokyo-based investors on Tuesday that the reason the BoJ appeared so reluctant to engage in more quantitative easing is that the central bank is not convinced it actually works. Many other analysts agree, although as one noted:
The BoJ is unlikely to take action on its own, and the Fed will clearly not support the BoJ in any currency intervention at the present time as it is not in its own interests to do so. The BoJ knows that. Ikeda [deputy finance minister] may also well know that, but is possibly ignoring the fact. The government is running out of policy options with interest rates at this low level, but a move to zero would not have much effect at this stage – it’s too late for that.
But the last word here should go — “appropriately”, of course — to Japanese officialdom, because you know it’s getting really bad when one of the BoJ’s own speak out.
As Bloomberg reports on Tuesday, a former member of the BoJ’s policy board Noboyuki Nakahara, on Tuesday described the BoJ’s measures as “too little and too late”. “The [measures] are meaningless and can’t stop the yen’s advance,” said Nakahara. Strong stuff in Japan’s inscrutable world of officialdom.
Meanwhile, they’re still talking Texas in Japanese officialdom, while the yen burns ever upwards …
Related links:
An illustrated history of yen intervention – FT Alphaville
Yen intervention 101: why it won’t work – FT Alphaville
The burgernomics of yen appreciation – FT Alphaville
Intervention threats: the never-yending story – FT Alphaville