Here’s the latest on Tokyo’s long promised (or should that be, threatened) intervention in the FX markets, as of about 6pm Tokyo time (10am BST).
The Bank of Japan is said to have sold a total of about $11-$12bn worth of yen into the market on Wednesday to buy dollars, according to traders and brokers at Tokyo’s biggest FX trading operations.
But that would seem a mere trifle given strong rumours that the BoJ has another Y10,000bn ($117bn) to back up Wednesday’s efforts.
It also seems a miniscule amount to have wreaked such market havoc, as the yen lurched down from Y82.88 in the early morning to Y85.40 against the dollar by about 5.30pm Tokyo time.
The BoJ’s supposed Y10,000bn “intervention war-chest” is also small compared to the amount spent in Japan’s last major intervention, in early 2004, when the central bank sold a record ¥14,831bn ($171bn) over 47 days, according to Ministry of Finance (Mof) figures.
Still, as one broker observed, the amounts said to be involved – and the impression of new resolve on the part of Japanese officials, after weeks of dithering and hollow pledges – have for now got the best of speculators: “Don’t expect the hedge-funds to fight the tape against that kind of firepower at this stage”, the broker noted.
Selling hundreds of billions of yen, according to traders, to weaken the currency against the dollar provided not only a very fetching spike on yen-dollar charts in trading rooms. It also pumped up shares in Japan’s household name exporters, who’ve been hit very hard in recent months by the yen’s relentless strength: every auto or TV they sell in the U.S. has been translating into a lot less revenue when the dollar price tag is translated back into Japanese currency.
There’s no pleasing some people, however, with the chairman of the Japan Shipowners Association Chairman Koji Miyahara telling reporters on Wednesday that an exchange rate of Y85 to the dollar was “still too strong” and that the government’s move to sell yen in currency markets was “too late”.
Many would disagree. But the big question is, what next, not just for Japan but, also, more broadly, in light of growing US pressure on China to allow its currency to appreciate further.
Some well-informed strategists maintain their view that the current intervention will come to nought and the yen will resume its upward path. SMBC, for one, in a Wednesday note predicted that the Japanese currency would reach a record high of Y79.75 within this year. Intervention, noted SMBC’s chief strategist Daisuke Uno, “will only help ease the yen’s sudden surge” for now.
JPMorgan’s Tokyo-based FX strategist Tohru Sasaki, a former BoJ staffer, predicted that the amount of yen-selling intervention this time will be “much smaller” than the 2003-04 operation – and similarly ineffectual, noting;
Considering the fact that USD/JPY declined more than 10% during the period even after spending JPY35 trillion in intervention, we can not expect the intervention this time to have a meaningful impact on USD/JPY.
Based on the previous experience, he says, the MoF/BoJ will probably intervene intermittently in coming weeks or months. At the same time, he warns, be careful - as there will be a lot of “fake” movements, where the market just pushes up USD/JPY as rumours spread although no actual intervention will take place: “The market will be full of speculation which will lead to volatile moves”.
Some relevant questions, meanwhile, about the yen’s future were raised by Hong Kong-based research and investment house Gavekal in its daily client note (links and emphasis ours):
This morning’s intervention by the BoJ in the exchange rate market raises a number of important questions for investors, including: Why did the BoJ wait so long to intervene? Did the central bank not want to be seen ‘taking sides’ in the leadership challenge to PM Kan? Was pressure on Japan being borne by a US Treasury keen to get China to accelerate the pace of RMB revaluation? With the yen having clearly broken through ￥85/US$ were the cries of the [Japanese business lobby] Keidanren simply getting too stringent? Or with the leadership challenge now out of the way, does PM Kan now have a freer hand to start putting pressure on Japanese bureaucrats?
The answers are not academic, asserts Gavekal, as they will likely dictate whether the current intervention is just a ‘flash in the pan’ or marks the start of a new policy from the BoJ of greater quantitative easing. That, in turn, will have a critical impact on Japanese as well as global financial markets, across asset classes. As Gavekal concludes:
Of course, in a world in which there is no free lunch, Japanese government bonds are the most likely asset class to bear the brunt of the BoJ intervention. Indeed, approximately 94 per cent of JGBs are held by Japanese investors, mainly large financial institutions. But if official Japanese policy is to now place a firm ceiling on the yen, then the natural consequence should be for Japanese investors to place their savings in higher yielding currencies such as the Australian dollar, at higher interest rates while running very limited exchange rate risk.
Today’s [yen] intervention thus not only raises the question of whether Japan is set to embark on a new policy of quantitative easing (about two years too late!) but also whether, like in 2002-03, the printing of money by Japan will mostly seep abroad?
On the question of China, perhaps the most thought-provoking view of the day comes from Tim Duy, who wonders on Economist’s View whether the Japanese realise that “the Chinese managed to get them to do their dollar-buying for them”. In early August, Duy wrote:
Now, suppose Japanese officials believe that intervention is required regardless of the G-20. Presumably, they will give US Treasury Secretary Timothy Geithner a phone call to at least keep him in the loop, if not to receive his implicit consent. One wonders if Geithner will recognize what he would be consenting to: Japanese intervention, if it occurs, means that Chinese authorities managed to get Japan to acquire their dollar reserves for them. Instead of buying dollars, China buys yen, which in turn induce Japan to buy dollars. This maintains the artificial capital flows to the US while allowing China to escape accusations of being a “currency manipulator.”
Simple, perhaps, but Duys – correctly – seizes on what he calls “last week’s almost comical complaint” about China’s recent purchases of JGBs, continuing:
Did policymakers recognize the irony of their situation? It is not exactly a secret that Japan has made frequents excursions into the currency markets. But apparently they feel that intervention should be limited to dollar purchases. Surely another Asian nation wouldn’t play the same game on them?
Alas, the Chinese did – under pressure to “loosen” the renminbi – and pushed the Japanese into intervening last night to tame the surging yen. In effect, the Chinese managed to get the Japanese to do their dollar buying for them.
With the dollar rising fast against the yen, notes Japan RealTime, it would seem the Japanese finance ministry’s gradual piecing together of an experienced intervention team last month, as well as recent dry runs on intervention, has paid off – for now.
Though, RealTime warns, if previous experience is anything to go by, “they’ll need to be in it for the long haul: In 2003-2004, the Bank of Japan was in the yen-selling business for fully 15 months”.
The problem, it warns, is that Japan is flying solo – a fact that became apparent after finance minister Noda confirmed on Wednesday that Tokyo had intervened unilaterally after informing counterparts in other countries. Concludes RealTime:
Without authorities in other countries taking similar action – particularly the US – the conventional logic is that Japan’s intervention “leaves Messrs Noda and Shirakawa performing a high-wire balancing act that could yet backfire”, notes RealTime, concluding:
If they’re in any doubt, Japan’s intervention boffins might want to place a another call to the Swiss National Bank: Switzerland’s central bank went ahead and did its own thing on intervention earlier this year, but by the time the SNB stepped away from efforts to curb the franc’s strength against the single European currency, the euro was at an all-time low against Switzerland’s currency.
Related links:
The politics of (yen) intervention (Sept 03) - FT Alphaville
The yen conundrum - CreditWritedowns
Japan, China and the intervention two-step (Sept 09) – FT Alphaville
FX intervention day? (Sept 08) – FT Alphaville