Hurrah, Japanese ¥ Intervention at Last!

♠ Posted by Emmanuel in , at 9/16/2010 05:59:00 PM
So it's finally happened over the last few days: Japan has jumped into the foreign exchange market to intervene as its currency possibly threatened to fall below 83 yen to the dollar. Certainly, Japan has, over the years, done much to shield itself from the effects of currency appreciation. Not only are there several Japanese MNCs which have offshored their plants across the globe ever since the Plaza Accord of 1985 that called for weakening the dollar vis-a-vis the yen and other major currencies, but bellyaching has been relatively little despite an incredibly strong yen in nominal exchange rate terms. (As many would point out, the deflationary pressures in Japan for sometime now mean the real effective exchange rate of the yen is not nearly as dramatic as its nominal exchange rate would suggest.)

No matter. Earlier this year, I even despaired that the Swiss had gotten into the forex intervention game ahead of the Japanese who hadn't done so since 2004--or that was until recently. It turns out that recent actions may have surpassed the single day record:
The Bank of Japan's money market data showed on Thursday that Japan's yen-selling intervention the previous day may have totalled around 1.76 trillion to 1.86 trillion yen ($20.52-21.69 billion). The BOJ's projection for Friday's money market conditions showed there will be 2.26 trillion yen in payments to banks from the public sector.

That compared with about 400 billion to 500 billion yen of payments from the government that money brokers had been expecting, excluding intervention. Market players say the 1.76 trillion to 1.86 trillion yen difference between their expectation and the projection is likely a reflection largely of yen payments due to Japan's yen-selling intervention on Wednesday, as currency trades are settled two days after the transaction [spot + 2].

Japan intervened in the market for the first time in six years on Wednesday and promised more to come in a bid to stop the currency's relentless rise from hurting exporters and threatening a fragile economic recovery.

Currency dealers have estimated that Japan sold about 2 trillion yen during intervention in the course of Asian, European and U.S. trade on Wednesday. If confirmed, that could be a record for Japanese yen-selling intervention on a single day, surpassing selling of 1.666 trillion yen on January 9, 2004.
So the single-day record probably fell. Here is the Japanese PM Naoto Kan saying there's more where that came from:
Naoto Kan, Japan’s prime minister, warned that his government was ready to take further “resolute action” in currency markets, despite complaints from US and European politicians about Tokyo’s dramatic unilateral yen-selling intervention.

Speaking to the Japan Chamber of Commerce and Industry on Thursday, Mr Kan said the strong yen and weak stock market had “added to uncertainty” about the Japanese economy, which is still struggling to shake off the effects of its sharpest postwar recession. “We will absolutely not permit precipitous moves in the yen,” Mr Kan said.

Tokyo on Wednesday intervened in currency markets for the first time in more than six years, sending the yen nearly Y3 lower against the dollar to just Y85.52 in a matter of hours. By Thursday morning in Tokyo, the US currency was trading at about Y85.35. Japan’s decision to intervene after the yen hit a series of 15-year highs has been praised by leading exporters, as well as by the Keidanren, Japan’s most influential business lobby.

Businesses made clear they expected Tokyo to continue to act against a strong yen, with Toshiyuki Shiga, chairman of the Japan Automobile Manufacturers Association, saying that even the new level would not be enough to erode export competitiveness. “We want the government and the Bank of bring the yen to a level below the Y90 line,’’ Kyodo news agency quoted Mr Shiga as saying.

While monetary authorities in Europe and the US have not publicly responded to the intervention – estimated by domestic media as involving the sale of up to Y2,000bn ($23.3bn) – it has exposed Tokyo to charges that it is failing to act as a team player at a difficult time for the global economy.

In Washington, the intervention was seen by some as likely to make it harder to persuade China to stop holding down the value of the renminbi. Sander Levin, chairman of the House of Representatives ways and means committee, suggested the unilateral intervention meant Japan also had a “predatory exchange rate policy”...“This is a deeply disturbing development,” he said in in a statement to a congressional hearing on China’s exchange rate policy.

Tim Murphy, a Republican US congressman who on Wednesday introduced legislation aimed at punishing China for manipulating its currency, speculated that Japan was thinking that “if China can intervene, ‘Why can’t we?’”...“If this is a situation where every country is looking out for itself, that is a problem,” Mr Murphy said.

“Unilateral actions are not an appropriate way to deal with global imbalances,” said Jean-Claude Juncker, who chairs the 16-member eurozone’s finance ministers group. Japan can argue that the unconventional monetary policies adopted by the US and European economies have played a role in weakening their currencies.
It seems cognitively-challenged American lawmakers have a problem with currency intervention in general and do not account for widely differing economic situations in China and Japan. Whither deflation? Nevertheless, a key takeaway point is that while I certainly enjoy the spectacle of yen intervention, it wasn't all that effective in tamping down the value of the yen appreciably in 2004. Moreover, there's still some ways to go before the magnitude of the current effort matches that of 2004. on this matter let's read what the Yomiuri Shimbun has to say:
In an unusual move, Finance Minister Yoshihiko Noda announced the intervention in an emergency press conference, and Bank of Japan Gov. Masaaki Shirakawa issued a rare post-intervention statement. "The market intervention was carried out to control excessive volatility in the exchange market," Noda said at the press conference. "The government will continue to carefully monitor the market. If necessary, further decisive action could be taken, including an additional intervention."

"Because of the recent instability in the foreign exchange and stock markets, the downside risks to the economy warrant attention," Shirakawa said in his statement. The Bank of Japan "strongly expects the intervention by the Finance Ministry will contribute to exchange rates becoming more stable," he added.

The Finance Ministry asked the Bank of Japan to intervene in the market at 10:30 a.m. The central bank began selling yen and buying dollars at 10:35 a.m. and continued doing so intermittently...

U.S. and European governments were not opposed to the yen's appreciation against their currencies, as their exports were helped by the situation. For this reason, the United States and European authorities were not willing to participate in a concerted intervention. Many economists believe this will mean the effect of the intervention will be limited, and it is unclear to what extent the yen's appreciation will be tamed.

Past interventions in the exchange market were carried out in situations such as when the yen rose to its record high of 79.75 yen against the dollar in 1995, when the U.S. economy was thrown into uncertainty after the Sept. 11, 2001, terrorist attacks, and when the dollar was sold aggressively after the U.S. invasion of Iraq and subsequent deterioration of the situation in the country from 2003 to 2004.

A market intervention is conducted under the authority of the finance minister, but the Bank of Japan actually carries out the intervention as a proxy of the minister. The last intervention was a series of moves between May 2003 and March 2004, and totaled about 32.87 trillion yen.

In an intervention to sell yen and buy the dollar to stop appreciation of the yen, the government issues short-term financing bills to procure yen and then purchases dollars from private banks [see above article on the mechanics of totalling intervention via settlement of transactions with commercial banks].

Chief Cabinet Secretary Yoshito Sengoku said in a press conference Wednesday morning that the government would take decisive action at appropriate times from now onward, reiterating Noda's comments. Sengoku said he could not confirm whether this was a unilateral action by Japan or a concerted intervention. He said, however, that the government requested understanding from the U.S. and European countries over the intervention.
BTW, the FT has an entire section on yen intervention now. While I certainly can't say yen intervention will be effective, it's good to know the ol' Land of the Rising Sun has still got intervention mojo going. Banzai!