Japan on Wednesday finally intervened in the foreign exchange market for the first time since 2004, bringing the yen to as low as Y85 to the dollar after it reached Y82.88 early in the day.
The move followed weeks of pledges to take “appropriate action” on the strong yen, and came just a day after Prime Mininster Naoto Kan won a leadership contest against challenger Ichiro Ozawa, who had called for a weaker yen.
As the FT reports (emphasis ours):
Tokyo intervened in the currency markets for the first time in more than six years to weaken the yen, after the currency broke through Y83 against the US dollar and threatened exporter profits and business sentiment.
The intervention on Wednesday morning gave the Nikkei 225 a boost, sending the stock average 1.8 per cent higher by the close of morning trading at 9,470.31, reversing an earlier 1.1 per cent decline.
Traders had been waiting to test Naoto Kan’s resolve to stay out of the market after he won his Democratic party’s leadership challenge from party heavyweight Ichiro Ozawa on Tuesday.
New of Mr Kan’s victory sent the yen as high as Y82.88 against the dollar by 10:25am on Wednesday in Tokyo. The yen then suddenly dropped 2 per cent to Y84.59 within an hour. The currency was trading at Y84.41 as of late morning.
Bloomberg meanwhile reports that finance minister Yoshihiko Noda told reporters that the move was unilateral. However, Tokyo had been in touch with other countries on the issue, he added.
Also, Bloomberg adds, chief cabinet secretary Yoshito Sengoku said the ministry “seems to think” Y82 per dollar to be the line of defence, and quotes officials saying volatility was a bigger concern than the currency’s level.
As FT Alphaville noted on Tuesday, analysts had been divided about prospects for intervention.
As the FT notes:
Analysts and investors had questioned whether the government would order the Bank of Japan to sell yen and buy dollars given the difficulties Tokyo would face in convincing its international counterparts, particularly… when the G7 is encouraging China to be more flexible with its own exchange rate.
RBS Securities’ Junko Nishioka – who on Tuesday suggested Kan would hold out against intervention for now – said on Wednesday that the authorities had probably decided to intervene realising that traders’ belief that the government would do nothing in the wake of Kan’s victory was pushing up the yen.
Ultimately, it could all be to little effect. As the FT reminds us, previous interventions in the market showed that while intervention helped over the very short-term, such as days or weeks, “unilateral intervention had not proven particularly successful over the long term”.
Indeed, predict the well-informed strategists at Sumitomo Mitsui Banking Corp, Japan’s intervention won’t stop the yen from reaching a record high of Y79.75 against the dollar this year.
The intervention “will only help ease the yen’s sudden surge,” said Daisuke Uno, SMBC’s chief strategist. “The yen will still break past a postwar high against the dollar by year- end.”
Related links:
FX intervention day? (Sept 08) – FT Alphaville
The politics of (yen) intervention (Sept 03) - FT Alphaville
The yen conundrum - CreditWritedowns
Japan, China and the intervention two-step (Sept 09) – FT Alphaville