What price Tokyo’s (first round) of intervention?

Posted by Gwen Robinson on Oct 01 10:16. Comment | Share

The details of Tokyo’s first yen intervention in six years have emerged from the Japanese finance ministry.

As Bloomberg reports on Friday, Japan sold Y2,120bn in the month through to September 28 in a bid to weaken the yen after it rose to a 15-year high on September 15. This was in many circumstances more than expected:

“The number exceeded expectations somewhat and may add to speculation they intervened more than once,” said Takashi Kudo, general manager of market information service at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. in Tokyo. “If the market gets the impression that they will continue to step in, that’s a positive for easing the yen’s gains. And exporters may not need to buy the yen in a hurry.”

To put it in context, that Y2,120bn ($25bn) worth of intervention far exceeded the previous single-day high of Y1,660bn that the BoJ put into yen-containment efforts on January 9 2004. In the eight months from January 2003, the government injected about Y13,300bn into the market in efforts to stop the yen breaking through Y115 to the dollar, according to finance ministry data.

Nomura’s Tokyo-based team led by currency strategist Yunosuke Ikeda estimates that this time, the finance ministry expects to spend a total of between Y10,000bn to Y20,000bn to try to curb yen strength. Tokyo’s current budgetary arrangement allows a maximum of Y34,700bn for FX intervention, according to end-June estimates, Ikeda adds.

At the same time, as the Bank of Japan heads into its regular policy meeting on Monday, and the yen stays stubbornly high, speculation is growing — as we noted on Thursday — that the central bank will take extra measures towards easing.

The BoJ’s problems are being compounded by extra pressure on the dollar-yen exchange rate, amid growing expectations in the US that the Fed will shortly take more steps to boost the economy. That follows the Fed’s September 21 announcementthat it is “prepared to provide additional accommodation if needed to support the economic recovery” – which has fuelled speculation of a fresh round of quantitative easing, as the Fed increases Treasury purchases.

So back in Tokyo, just to keep people on their toes, as Bloomberg adds:

Finance Minister Yoshihiko Noda [on Friday] reiterated the government’s resolve to take bold action on the yen if necessary. Vice Finance Minister Mitsuru Sakurai yesterday said he expects the Bank of Japan to make appropriate policy decisions at a monetary policy meeting next week, an indication the government wants the central bank to do its part in supporting growth.

Meanwhile, Julian Jessop of Capital Economics has some thoughts on the recent Japanese intervention, as he writes in a client note:

This month’s intervention by Japan to weaken the yen has contributed to fears of a “global currency war” or, viewed more positively, to hopes that large-scale unsterilised intervention by the major central banks will be another important way in which unconventional monetary policy will be used to boost nominal demand and asset prices. We are far from convinced.

For a start, if the aim of Japanese authorities was to cause a fundamental shift in sentiment towards the yen, they have clearly failed. The yen initially fell sharply after the official intervention on 15th September, but it has now retraced almost all of that decline. The upshot is that, rather than making intervention by others more likely, this failure has surely reduced the chances that central banks elsewhere will follow Japan’s example.

What’s more, there is very little evidence that Japan regards currency intervention as a tool of monetary policy… two key points: first, it is worth clarifying just whose intervention it was. The Bank sold yen for dollars… However, the Bank was simply acting as the agent for the Japanese government and specifically for the Ministry of Finance, which determines currency policy.

Second, too much has been made of the fact that the intervention was apparently unsterilised. The yen sold do seem to have been allowed to accumulate in commercial banks’ current accounts at the Bank of Japan (thus loosening monetary conditions), rather than been mopped up through operations such as bill sales. But this may not be as significant as it first appeared.

Anonymous “official sources” have suggested that the intervention has not been fully sterilised (yet?), but there has been no formal statement on this issue from the Bank. Current account balances held at the Bank have risen by ¥2-3 trillion since 15th September, the bulk of which may well represent unsterilised intervention. However, these balances usually rise anyway in late September as the end of the fiscal half year approaches. The Bank may simply have decided to leave the intervention funds in the market ahead of the fiscal half year-end as a convenient way of providing extra liquidity, but will then allow them to drain again in October as seasonal pressures unwind.

Even if left fully unsterilised, notes Jessop, the Y2,000bn or so spent would represent just 2 per cent or so of Japan’s monetary base, and less than 0.3 per cent of the broad monetary aggregate, M2. This figure, he notes, is:

…also dwarfed by other possible monetary policy changes – for example, if the Bank does ease policy further next week, the leading option would probably be an increase in the total amount of cheap loans under the special funds-supply operation from Y30,000 to Y50,000 – an increase potentially 10 times bigger than any boost from the intervention.

Overall, says Jessop, the markets “may have read far too much into the actions of the Japanese authorities”. He concludes:

“We certainly stick to our first thought that the intervention will not fundamentally alter the outlook for the yen. Moreover, the move is still best seen as a gesture to appease domestic criticism of PM Kan, rather than the first in a series of unsterilised interventions designed to complement other monetary tools. And if Japan’s actions were the opening salvos in a global currency war, they have proved to be a damp squib.”

Related links:
Japan intervention watch - FT Alphaville
Yen intervention: Did they or didn’t they? – FTAlphaville (Sept 24)
In-depth: Yen intervention – FT.com
What next for the yen: ‘A lot of fake movements’ – FT Alphaville