Yen stead­ies but Ja­panese in­ter­ven­tion ru­mours per­sist

The Pak Banker - - MARKETS/SPORTS -

Could the Bank of Ja­pan be about to in­ter­vene in the for­eign ex­changes to weaken the soar­ing safe-haven yen? Ru­mours have been cir­cu­lat­ing widely in the cur­rency mar­kets this week af­ter a surge in the yen from a re­cent high for the dol­lar of ¥121.70 at the end of last month to a low of ¥111.00 on Fri­day.

How­ever, it was steady against the dol­lar through­out Fri­day's Asian mar­ket ses­sion de­spite very sharp falls for the Nikkei 225 stock mar­ket in­dex and there was no of­fi­cial sign of in­ter­ven­tion by the Ja­panese au­thor­i­ties to sta­bilise it.

The dol­lar opened the ses­sion at ¥112.20 or so, peaked at ¥112.68 and is now back in the ¥112.58 area.

The gos­sip sug­gested that Ja­pan's cen­tral bank was "check­ing rates" - call­ing traders to ask for a quote in an ef­fort to warn them that buy­ing yen was a risky thing to do. It's re­garded as a half-way house be­tween try­ing to talk the cur­rency down to pre­vent its strength from dam­ag­ing the Ja­panese econ­omy and ac­tual yen sell­ing to weaken the cur­rency.

With the yen at its firmest against the dol­lar since Oc­to­ber 2014 de­spite neg­a­tive Ja­panese in­ter­est rates, an­a­lysts have al­ready warned that in­ter­ven­tion is pos­si­ble, al­though it won't nec­es­sar­ily be suc­cess­ful. "Di­rect FX in­ter­ven­tion is a ma­jor threat on USD/JPY moves below 115," wrote the strate­gists at HSBC ear­lier this week. "As we ar­gued, the move to neg­a­tive rates had only a fleet­ing im­pact on JPY but showed a de­sire for a weaker cur­rency. It looks like we may head back to di­rect FX in­ter­ven­tion but that is also hard to jus­tify and may ul­ti­mately fail," they added.

The man known as Ja­pan's top cur­rency diplo­mat, Masatsugu Asakawa, has al­ready said that he is watch­ing daily ex­change-rate move- ments care­fully to check for ex­ces­sive volatil­ity. In an in­ter­view with the Nikkei news­pa­per this week, he was quoted as say­ing that "buy­ing pres­sure has con­cen­trated on the yen as a safe haven as global fi­nan­cial mar­kets were un­sta­ble", adding that the rise in the yen had out­paced in­creases in other cur­ren­cies since the start of this year.

How­ever, at­tempts by of­fi­cials to talk down the yen have failed in the past even though coun­ter­ing yen ap­pre­ci­a­tion was a key el­e­ment of Prime Min­is­ter Shinzo Abe (above)'s "three ar­rows" pol­icy in­tro­duced when he was re-elected just over three years ago.

"FX mar­kets will have to re­main mind­ful of the in­ter­ven­tion threat, par­tic­u­larly in Ja­pan. This may take many forms, in­clud­ing rhetoric and more rate cuts (we ex­pect two more later in 2016), but the grow­ing event risk is that Ja­pan in­ter­venes di­rectly in the FX mar­ket," wrote the HSBC strate­gists.

"Mar­kets may mis­tak­enly as­sume that, as in­ter­est rates up to 10 years are neg­a­tive in Ja­pan and yields on ex­cess de­posits at the BoJ are now neg­a­tive, in­ter­ven­tion may be more suc­cess­ful. Af­ter all, any coun­ter­part to BoJ in­ter­ven­tion will be sit­ting on JPY with a neg­a­tive yield" they added.

"How­ever, even in the un­likely event that any BoJ in­ter­ven­tion is un­ster­ilised, Switzer­land's ex­pe­ri­ence with FX in­ter­ven­tion with neg­a­tive in­ter­est rates shows that suc­cess is not guar­an­teed, even un­der th­ese con­di­tions." When cur­rency in­ter­ven­tion is un­ster­ilised, the money sup­ply is al­lowed to in­crease.

Oth­ers agree that in­ter­ven­tion is pos­si­ble but see it as un­likely. "The surge in the yen against the US dol­lar has un­der­stand­ably raised ex­pec­ta­tions of fur­ther ac­tion to weaken the Ja­panese cur­rency," writes Ju­lian Jes­sop, chief global econ­o­mist at Cap­i­tal Eco­nom­ics.

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