So much for Tokyo’s big, bold, intervention move. The yen rose further on Wednesday to Y83.50 before settling (temporarily no doubt) at around Y83.60.
That marks its highest against the dollar since Tokyo intervened on September 15 to try to curb its strength.
The yen’s defiant rise — having initially dropped 3.4 per cent on Tokyo’s intervention to Y85.70 — has set off another wave of speculation and market rumour that the Bank of Japan may intervene again, even as many observers are still scratching their heads and wondering if the yen’s gyrations last Friday were due to ‘stealth intervention’ by the authorities.
While Japanese officials remained silent on the matter, the savvier traders and brokers have concluded that the BoJ may well have conducted a small “test intervention” on Friday to gauge market responses to further official action.
For a while there, it looked as though Friday’s rumours could have touched off a new bout of yen weakness. But it was not to be.
More, however, may be revealed on Thursday, when Japan’s finance ministry is due to report the amount of yen sold by the BoJ in currency markets from August 28 through September 28.
Interestingly, the latest rise in the currency follows the release on Wednesday of the BoJ’s closely watched quarterly Tankan business survey. As the FT reports, the results showed that manufacturers were more optimistic in September than economists had expected – but are bracing for more gloom ahead.
Regardless of the September uptick, Bloomberg notes that overall business confidence rose the least since early 2009, and that companies forecast that pessimists will outnumber optimists by year-end – largely due to the impact of the rising yen.
The survey’s evidence of increased confidence however appeared to contradict recent corporate complaints about the impact of the yen’s climb to 15-year highs against the dollar and a slowdown in economic growth.
Even so, Japanese companies are now predicting the average yen exchange rate against the dollar to be higher in the October-March period than they expected in the last survey in June, the survey showed. Bloomberg notes:
Stagnating sentiment adds to the case for the Bank of Japan to ease monetary policy as Prime Minister Naoto Kan compiles a stimulus plan to counter the effect of the yen’s 10 percent surge against the dollar this year...
“The BOJ may have little choice but to take some action at its next meeting” on Oct. 4-5, said Norio Miyagawa, senior economist at Mizuho Securities Research and Consulting Co. in Tokyo. “The yen is still on the rise even though the government intervened in currency markets and pledged an extra budget.”
Indeed, the yen remains much stronger than the Y89.44 per dollar average estimated by large manufacturers for the six months to March 2011.
As JPMorgan’s Tokyo-based strategist Tohru Sasaki says in a Wednesday note: “The projected rate was merely revised down to Y89.44 even with dollar-yen trading below Y85 for most of the survey period… This means that exporters’ hedging operation should still be lagging behind significantly.”
In Sasaki’s view, a second (offical) round of intervention is “unlikely”, even if USD/JPY declines below Y83, the level at which the Ministry of Finance and BoJ started intervention. He adds:
We believe there is no line in the sand at 82s. If we are correct, it will disappoint many market participants including Japanese exporters and may accelerate downside movement in USD/JPY.
Meanwhile, the broader theme of currency intervention generates ever-more fierce debate – and, seemingly, ever more intervention, judging from FT Alphaville’s handy “intervention roll”.
Even as the US Congress considers legislation to force China to let its currency appreciate, talk of “currency wars” – thanks to Brazil’s finance minister – has become the hot catch-phrase, as the FT’s own Martin Wolf notes in a Wednesday column.
And in the eyes of many observers, there is perhaps no better demonstration of “currency war” strategies than China’s recent moves to buy Japanese government bonds, thereby forcing the Japanese to act. On this theme, recently outlined by FT Alphaville, Daniel Gros at VoxEU sums up Japan’s (and America’s) big problem:
The recent move by China to invest heavily in Japanese government bonds has set in motion a chain reaction. The Japanese authorities had little choice but to react to the Chinese move by intervening themselves in the only really liquid market, namely the market for dollars. Japan got the blame for its “unilateral” move, but the end result was the same as if the Chinese had bought US assets themselves. The Japanese are only unwitting intermediaries, who, on top of the blame, have to take on even more exchange rate risk.
Overall it seems that the rest of the world with free capital markets can do little to stop the Central Bank of the People’s Republic of China to continue “steering” its exchange rate by accumulating more and more international reserves – it does not matter whether these are US or Japanese. The US, Japan, or the ECB cannot do the same because China has capital controls and there are simply no significant renminbi assets that foreigners are allowed to invest in.
The “easy and legal solution” to stopping currency manipulation, in Gros’s view, is:
The US (and Japan) could easily prevent the Chinese Central Bank from continuing its intervention policy without breaking any international commitment. The US and Japan only need to invoke the principle of reciprocity and declare that they will limit sales of their public debt henceforth to only include official institutions from countries in which they themselves are allowed to buy and hold public debt. Instead of the “moral suasion”, tried in vain by the Japanese, the Chinese authorities would just be told that they can buy more US T-bills Japanese bonds only if they allow foreigners to buy domestic Chinese debt.
Imposing such a “reciprocity” requirement on capital flows would be perfectly legal – although the US (and Japan and all EU member countries) have notified the IMF that they have liberalised capital movements under Article VIII of the IMF. Yet, in contrast to the area of trade, there are no legal constraints on the impositions of capital controls.
Such a “reciprocity measure” would, of course, be equivalent to a very specific form of controls on capital inflows. Not only that, it would require some degree of trust and willingness to negotiate between key parties.
And that, in light of the recent sharp deterioration of Sino-Japanese relations, is about as unlikely to happen as a “reciprocity agreement” to stop currency manipulation.
There is, notes Lex, a painful irony in the battle to reach the currency bottom: in the long term, successful devaluation does not have a good economic effect. Exchange rates generally rise along with prosperity (see Japan and Germany) and falling currencies may not push up growth rates or even get trade into balance (see the US).
But this economic truth will not keep a currency war from breaking out — unless politicians and central bankers decide to recognise it.
Related links:
More yennery, what next? - FT Alphaville
In-depth: Yen intervention – FT.com
Inflation and the BoJ - FT Alphaville
What next for the yen: ‘A lot of fake movements’ – FT Alphaville