Japanese FX Intervention: A Game Changer

Bank of Japan intervened in the currency market for the first time in six years. The JPY quickly weakened by 2%, as the authorities confirmed that interventions were made. The Japanese intervention raises a lot of questions, and will probably be one of the biggest game changers in the financial market this year.

“It is easier for a central bank to weaken than strengthen its currency.”

Øystein Dørum

Japan's Finance Minister, Yoshihiko Noda.

Today’s interventions may have given the exchange rate a small push in the right direction. But at the end of the day it’s the markets that decide. Another issue is the popularity of the interventions among Japan’s trading partners. As a surplus country, Japan is among the nations that should see its currency strengthening to reduce global imbalances.

Japanese yen were before the financial crisis an important source of so-called carry trades (whereby one borrows in low interest currencies and invest in high yielding ones), and the JPY weakened steadily from mid-2000 to mid-2007.

Since then, the trade-weighted index has strengthened by almost 50%.

USD/JPY has appreciated from 122 in January 2007 to 83 currently, the strongest since the brief peak in April 1995. The strengthening weakens Japanese competitiveness and threatens to derail the rather weak Japanese upswing after The Great Recession.

Following the re-election of Naoto Kan as Japanese PM, the USD/JPY broke through the 83-barrier, which triggered central bank interventions, the first in six years.

Highly Uncertain

The increasingly stronger Japanese currency is hurting the export depending nation.

If today’s action will be a success or not, remains to be seem.

Central bank interventions are rarer than before, and not without reason. It requires a lot of financial muscles and patience to stand up against global markets.

But according to chief economist Øystein Dørum at DnB NOR Markets, there are two factors in favor of the Japanese:

Chief economist Øystein Dørum, DnB NOR Markets

“Firstly, mots analysts and economists see the JPY as overvalued  – we expect it to reach 95 vs USD in a year. Secondly, it is easier for a central bank to weaken than strengthen its currency, as it may supply the market with unlimited quantities of its own currency,” Mr. Dørum writes in a commentary at the banks website.

Today’s interventions may have given the exchange rate a small push in the right direction.

“But at the end of the day it’s the markets that decides,” Mr. Dørum rightfully points out.

Another issue is the popularity of the interventions among Japan’s trading partners.

As a surplus country, Japan is among the nations that should see its currency strengthening to reduce global imbalances.

After the interventions, Bank of Japan issued a statement saying that they would continue with strong monetary easing and would continue to provide the market with “ample liquidity.”

According to the Norwegian chief economist this is “a clear signal that the increased liquidity after the interventions will not be sterilized.”

Market Snap Shots

Well, here’s how the European FX markets reacted to the news from Japan.

USD/JPY:

EUR/JPY:

GBP/JPY:


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14 Comments

Filed under International Econnomic Politics, National Economic Politics

14 responses to “Japanese FX Intervention: A Game Changer

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