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  • Japan moves to weaken yen

    By Chico Harlan
    Washington Post Foreign Service
    Wednesday, September 15, 2010; 9:46 AM

    Japan on Wednesday intervened in the foreign currency market for the first time in six years, buying dollars as a means to weaken the yen and lower the price of Japanese exports overseas.

    The move came after weeks of pressure from Japan's business leaders, who had watched the yen rise roughly 10 percent against the dollar this year, reaching a 15-year high. The intervention also marked the first major decision - and the first major surprise - following Tuesday's reelection of Prime Minister Naoto Kan, who earlier had indicated a reluctance to manipulate the market. Following Kan's defeat of challenger Ichiro Ozawa, the yen rose as high as 82.86 against the dollar, with currency investors assuming that intervention was unlikely.

    By buying dollars and selling yen, Japanese monetary authorities soon had the yen valued at 84.50.

    Because Japan did not coordinate the move with other countries, economists viewed Wednesday's intervention as a short-term fix. But the move eases pain for Japan's iconic exporters, including Sony and Toyota, whose products become more expensive abroad when the yen strengthens. Toyota has said that it loses 30 billion yen (about $350 million) for every 1 yen gain against the dollar.

    "I think both the government and the Bank of Japan were blushing with shame while watching the yen rise," said Takashi Watanabe, a professor at Bunkyo University and a former bank supervisor for the Bank of Japan. "I think they just could not let that past them and played their card."

    The stock market supported the move, which was made in tandem by Japan's central bank and its finance ministry. Following the move, the Nikkei 225 stock average jumped 2.3 percent, closing at 9516.56.

    "Our country's economy is still in a very severe situation with continued deflation," Finance Minister Yoshihiko Noda said. Noda said Japan "cannot tolerate" the appreciating yen. He indicated that further intervention would be considered, if necessary.

    Japan did not reveal the extent of its intervention, but the Dow Jones news service suggested that the Ministry of Finance probably had sold $11.7 billion (or 1 trillion yen).

    Bank of Japan governor Masaaki Shirakawa said in a statement that he "strongly expects that the action . . . will contribute to a stable foreign exchange rate formation."

    Japan had not intervened in the market since March 2004, part of a global trend toward a hands-off approach. But Japan is dealing with widespread woes, including growing concerns that its two-decade-old economic slumber will continue into a third. Japan's economy was recently surpassed by China's as the world's second-largest.

    Special correspondent Akiko Yamamoto in Tokyo contributed to this report.
    “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson

  • #2
    FOREX-Dollar surges after Japan intervenes to weaken yen

    Related News

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    * FOREX-Dollar soars, yen falls as Japan intervenes
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    Analysis & Opinion

    Wed Sep 15, 2010 2:14pm EDT

    * Japan intervenes for first time in six years

    * Dollar rises to 85.77 yen, runs into strong offers

    * Key resistance above 86 yen still untested (Recasts throughout; adds comments, details)

    NEW YORK, Sept 15 (Reuters) - Japan intervened in global currency markets on Wednesday, pushing the yen down 3 percent against the dollar, but it was uncertain the intervention would depress the currency for long.

    Dealers said the Bank of Japan spent $20 billion or more to weaken the currency against the dollar, which staged its biggest daily gain against the yen in nearly two years.

    By mid afternoon in New York, the dollar had climbed as high as 85.78 yen on electronic trading platform EBS JPY=EBS, and 85.77 on Reuters JPY= up from a 15-year low beneath 83 yen. It last traded at 85.63 yen. The dollar looked poised to break resistance on the 50-day exponential and simple moving averages, if not on Wednesday then in coming days.

    That said, analysts remain unconvinced the Bank of Japan will be able to successfully fend off the rising yen.

    "It probably takes a lot more money than any central bank is willing to print to defy the larger economic forces at work," said Dan Cook, senior market analyst at IG Markets in Chicago.

    The euro, sterling and Australian dollar also soared against the yen as a result of the Japanese intervention, which the Ministry of Finance said was carried out without any foreign assistance.

    The timing caught markets off guard, coming after Prime Minister Naoto Kan won a party leadership election over a challenger who was a more strident advocate of intervention.

    It also came when speculators were heavily positioned in favor of the yen, forcing them to buy back the dollar aggressively and accelerating greenback gains.

    Among winners on Wednesday were Japanese exporters who were able to exchange dollar earnings above 85 yen. Some analysts said China was likely to welcome Japan's moves as it would dampen U.S. pressure on Beijing to allow its own currency to rise against the dollar.

    "What we have seen is a few people come in and buy yen at these levels, but the thing is that the yen is still very very strong," said Brendan McGrath, manager of business solutions at Custom House, a Western Union company, in Victoria, British Columbia with corporate clients based in the U.S., Canada, Australia and New Zealand who need to hedge currency risk.

    The euro rose 3.2 percent to 111.35 yen EURJPY=, on track for its best day since February 2009, while the Australian dollar AUDJPY=R rose 3.2 percent and sterling 3.7 percent GBPJPY=R. The euro rose 0.1 percent against the dollar to $1.3008 EUR=.


    A softer yen makes Japanese exports cheaper and boosts company profits, relieving pressure on a fragile economy. Nomura currency strategist Jens Nordvig said Japan will try to keep the dollar above 85 yen and it could get as high as 87 yen in the days ahead. But he said a weak U.S. outlook would eventually push it back below 83 yen by year-end.

    December dollar/yen futures were last at 85.52 yen JYZ0

    New York traders said a weaker dollar-yen trend would remain intact until the dollar tests 86.70, the 38.2 percent retracement of its June-to-September decline.

    A 15-month Japanese intervention campaign that ended in 2004 cost about 35 trillion yen and achieved mixed results.


    The Bank of Japan started buying the dollar around 0130 GMT on Wednesday and has been active since, with $2-3 billion spent in early New York hours, traders said. [ID:nTOE68E02W]

    Billionaire George Soros told Reuters Insider Japan was right to weaken the yen. [ID:nWEN9786]

    CitiFX strategists said many investors appeared to open short dollar-yen trades at "unattractive levels," which suggests the unwind of those trades may aid BoJ efforts. But preventing yen strength could prove difficult if the Federal Reserve decides to pump more money into the U.S. economy to prevent a faltering recovery from stalling.

    Recent signs of weakness in the U.S. economy have narrowed the gap between U.S. and Japanese bond yields, prompting investors to ditch dollar-denominated assets and buy yen. U.S. yields fell on Wednesday, as investors bet that Japan would recycle some of their massive dollar purchases into U.S. government debt. [ID:nN15385216]

    "There is a potentially 'vicious circle' dynamic to it," Nomura's Nordvig said.

    By the Bank of Japan buying short-dated Treasuries, the difference in short-term yields between the U.S. and Japan could become more pronounced in favor of Japan, causing more repatriations to Japan and yen strength even as the Japanese central bank attempts to weaken the yen.

    It remains unclear whether this will happen, though as sources familiar with the matter said the BOJ was ready to leave the intervention unsterilized rather than drain the funds that went into the currency market. [ID:nTKX006996] <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ ^^^^^^^^^^^^

    For dollar/yen correlations:

    For PDF on the yen's rise

    For graphic on intervention

    For Reuters Insider on yen


    For Breakingviews on BOJ intervention [ID:nLDE68E0JD]

    Billionaire George Soros on Reuters Insider [ID:nWEN9786]. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ ^^^^^^^^^> (Additional reporting by Wanfeng Zhou, Gertrude Chavez-Dreyfuss and Vivianne Rodrigues in New York and Jessica Mortimer in London; Editing by Andrew Hay) (Reporting by Nick Olivari and Steven C Johnson)
    “the misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all” -- Joan Robinson


    • #3
      Not good. Beggar thy neighbor has begun. Some takes I've seen on it.

      Economist's View

      By Tim Duy, the Director of Undergraduate Studies of the Department of Economics at the University of Oregon and the Director of the Oregon Economic Forum, who writes at Tim Duy’s Fed Watch

      At the beginning of August, I 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.”
      Since then, Japan’s currency challenge only intensified, culminating in last week’s almost comical complaint from Japanese policymakers:

      Japan’s government said it will seek discussions with China over the nation’s record purchases of Japanese bonds as an appreciating yen threatens to undermine an economic recovery.

      Japan is closely watching the transactions and will seek to maintain close contact with Chinese authorities on the issue, Vice Finance Minister Naoki Minezaki told lawmakers in Tokyo. Finance Minister Yoshihiko Noda suggested at the same hearing that it’s inappropriate for China to buy Japan’s bonds without a reciprocal ability for Japanese to invest in China’s market.
      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. Honestly, I have a hard time faulting the Japanese. They are facing a serious deflation problem, and pumping Yen into the system is an appropriate response (all though, they might simply sterilize the intervention, which would be, in my opinion, a policy error).

      What must be going through the head of US Treasury Secretary Timothy Geithner at this point? After all, as far as global imbalances are concerned, if he can’t stop central banks from intervening in the Dollar, he really isn’t going to be making much progress on reversing the deteriorating US trade deficit . And before anyone gets too excited about the most recent trade numbers, note the trend remains intact. (Moreover, CR is tracking the L.A. ports data, and it looks ugly). Geithner is now out and about trying to jawbone Chinese officials. From his interview with the Wall Street Journal:

      WSJ: Are you satisfied with China’s progress on the yuan?

      Geithner: Of course not. China took the very important step in June of signaling that they’re going to let the exchange rate start to reflect market forces. But they’ve done very, very little, they’ve let it move very, very little in the interim. It’s very important to us, and I think it’s important to China, I think they recognize this, that you need to let it move up over a sustained period of time.
      So, Geithner finally realizes the extent of the Chinese nonevent. Recall the press fanfare that accompanied the initial Chinese currency announcement – journalists falling all over themselves to speak brightly of China’s economic maturation. How many of those stories were sourced by Treasury officials crowing about the breakthrough that allowed them to avoid labeling China a currency manipulator? And where does this leave Geithner? Either complicit in trumping up the most minor of policy adjustments, or completely sucker punched by his Chinese counterparts. Honestly, I don’t know which is worse.

      What it all boils down to is this: There apparently is no motivation for global central banks to stop directing capital inflows at the US in an effort to support mercantilist objectives. If it isn’t China, it will be some other economy. And equally apparent, there is no motivation among US policymakers to address such government directed capital flows. Which will leave politicians falling back on ultimately harmful trade barriers. The absolute inability of US policymakers to seriously address a global financial architecture where a rule of the game is “when in doubt, buy Dollars” will ultimately have serious consequences via disruptive adjustment when the system can no longer be maintained, via either external or internal forces.
      Pretty brutal but true take on Geithner: he's either malicious or incompetent.

      Further elaboration in the comments from one blog's author:

      Could you post a primer of currency exchange rates, why they matter, and how they’re determined?

      More importantly, what the heck does this mean ” And equally apparent, there is no motivation among US policymakers to address such government directed capital flows. Which will leave politicians falling back on ultimately harmful trade barriers. The absolute inability of US policymakers to seriously address a global financial architecture where a rule of the game is ‘when in doubt, by Dollars’ will ultimately have serious consequences via disruptive adjustment when the system can no longer be maintained, via either external or internal forces.”

      On the one hand, I understand what you are saying. On the other, it strikes me as cognitive dissonance. “No motivation,” “harmful trade barriers,” “absolute inability,” these phrases all smack of attempting to force reality to converge with expectations. “No motivation” is, in fact, complicity. “Harmful trade barriers” is, in fact, treating citizens as citizens to be protected instead of consumers to be exploited. “Absolute inability” is, yet again, complicity– learned complicity.

      What does it take to break free of this farce?
      Currencies can and do trade away from fundamentals for such protracted period that it is hard to speak meaningfully of how prices are formed. And some rule of thumb have been turned on their head. When I was young, a high yield currency was viewed as suspect because the yield meant it was due to be devalued. Now they are prized by currency traders when risk appetites rise. Japan’s fundamentals say the yen should be much cheaper, but China has been buying yen.

      Re Tim Duy’s last paragraph, he might have unpacked it a bit more. Most economists agree that for the US to raise trade barriers now when the economy is slack would be a plus. But China is unlikely to take that lying down, and tit for tat could easily escalate into a full blown trade war.

      Tim is arguing that China is pushing the current Bretton Woods II system to destruction. They presume we won’t dare retaliate, but if unemployment stays stuck at current levels, Congress is increasingly likely to take action.
      A couple different articles on Zero Hedge, one pointing out the similar position of Switzerland in regards to the EU as Japan are to China:

      Central banks (and specifically their credibility) just can't get any love these days. Why should they: the Swiss National Bank spent a boatload, blew up its balance sheet, pissed off trade unions, and achieved nothing at all. And if Japan itself is any indication, the BOJ spent $300 billion a few years ago, and the JPY still hit all time highs yesterday. So unless someone believes that the BOJ can afford to spend about double that number to actually achieve results (and they can't) every uptick in the JPY should be shorted (and that ignores that stench that Schumer is about to raise any minute calling for a boycott of every Prius and Sony TV in the US for ever and ever as long as the BOJ continues to manipulate). Even Goldman's Thomas Stolper, who tends to be somewhat more polite than Zero Hedge, has come out with a 6 month target in the USDJPY below 79 due to the "impact of US QE, persistent trade surpluses and the attraction of testing the authorities’ resolve to intervene again." We would certainly agree on this one.
      The Japanese have finally stepped up to the plate in support of a weaker Yen. They spent $10+ billion buying dollars and got two big figures in the FX rate for their effort. I doubt that it will last for a week.

      With the Japanese hand being played out the market will be looking at the other “Strong” currency, the Swiss franc. If the market can’t make money selling dollars (and Euros) for Yen then it is likely that the market will turn its full attention on the Swissie.

      The 1.30 exchange rate for the EURCHF is already hurting Swiss exporters, farmers and tourism. It is likely to get worse before it gets better. With that in mind I thought it was interesting to see that the Swiss Trade Union, “SGB” is calling for the Swiss National Bank to either step up its intervention efforts or establish a two tier exchange rate system. From NZZ today:

      The monetary authorities should intervene directly in the foreign exchange market, SGB representatives demanded on Wednesday before the media. Export companies should also switch to a special rate euro against Swiss francs.
      This kind of talk will make the SNB chief Philipp Hildebrand quake. He knows that he/the SNB is functionally powerless to stop the appreciation of the Franc. In the biggest days of intervention they were doing 1-2 billion of sales. How big is the market? The SNB estimates it is 250b a day. Conclusion? The SNB does not stand a chance.

      The SNB reserves are in dollars, Euros and gold. At this point they are taking big losses on their currency holdings. The numbers to be announced soon could push another 8 billion Francs for the quarter. There is a limit to what the SNB can absorb. And the market knows it.

      With this in mind the notion of a two-tiered FX rate makes some sense. The free rate would be allowed to float wherever the markets might take it. Exporters would have access to a subsidized rate from the SNB and thus would be largely insulated from market gyrations. The SNB would have losses to be sure. But those losses would go directly to the exporters and not the speculators in the FX markets. In that sense it is not a hard sale to the Swiss people. The flip side is that a lot of the Swiss want a stronger franc. They can travel outside the country and shop at a much cheaper cost.

      To me the idea of a two-tiered franc is crazy. If implemented it would be a modern day “Smoot-Hawley” type of event. The EU would go nuts and retaliate. Half a dozen other countries would copy the Swiss move and we would be looking at a major breakdown in global trading. From these types of steps global recessions are born.

      But the flip side is will tiny Switzerland roll over and let the global markets dictate their economy? That would seem unlikely as well. So something has to give. The most unlikely outcome is that the Swissie weakens against the dollar and the major crosses.

      We are going to hear more protectionist talk in the coming days. The Japanese have said (through last night’s intervention) that they do no want to import more global deflation. So they have teed this up. Where it goes is anyone’s guess. But there are very few soft landing scenarios out there that I can think of.

      If (when) the EURCHF gets to around 1.25 there will be some action. If it is first renewed intervention and that proves both costly and a failure the talk of a two-tiered franc will come on the table. I doubt the Swiss are just going to sit there and get rolled over. The Great Sucking Noise will get much louder if that should be the result.
      See here as well: FT Alphaville » What next for the yen: ‘A lot of fake movements’
      Last edited by rj1; 15 Sep 10,, 20:45.