We won’t manipulate it

On Thursday night, the Yen hit the strongest position against the dollar since the Second World War. After a surge of around 4% in one hour, it was trading at dollar/yen 76.25. Many state that the strengthening of the Yen was caused by market perception of repatriation of investments going back to the Japanese financial market which many experts do perceive as a short term occurrence and speculation. The reaction from the financial minister Igarashi was swift and with the support of the G7 group an intervention in the market was done this Friday morning. The selling of Yen started with Bank of Japan and was followed up by Europe’s central banks, the Bank of Canada, and the Federal Reserve Bank of New York with an estimated 2 trillion yen ($25 billion) used. The rate of the currency fell to 81.36 at noon today. 

First intervention by the G7 since 2000

This was the first intervention in the market by Japanese authorities since November of last year. At that time the Yen had reached an all-time high of 82.88 the highest since 1995 however, the BOJ acted alone and sold off 2 trillion yen. For the G7 this was the first intervention in the Forex market in 10 years. The last time was in 2000 when G7 stepped in to intervene in the market for the Euro; this caused the Yen to weaken against all of its 16 most-traded peers.

What the G7 is hoping to do with this intervention and the strong message it sends to the market is to force investors out of long positions that have been taken against the Yen; a stable Yen will help boost the economy and exports now that domestic demand has collapsed due to the devastating earthquake that occurred last week.

BOJ and its stance with manipulation

Source: Top News

The finance minister was quoted this morning as saying: “We won’t manipulate it, but I hope that the yen goes back to where it was before the earthquake.” It seems odd to me that an intervention is just an adjustment back to a level that the government deems appropriate for the Yen to be valued at, and not the market. The BOJ also said that they will continue with powerful monetary easing to avert the economy slipping into a recession.

There are four different explanations that experts have developed to explain the increase in value of the Yen:

• Japanese insurance and finance institutions have started to bring capital back from abroad to fund the crisis situation
• Japanese households have started to bring home investments abroad to get a higher interest rate on their investment
• Outward flow of capital has diminished compared to previous levels
• Speculators have been forced to buy more Yen to fund their deals

Weakening the Yen

One may ask if this intervention is enough to weaken the Yen. Deutsche Bank has stated that Japan may need almost $500 billion to weaken the Yen and fight the forces that where driving it up. This estimation comes from looking at previous interventions as well as the size of the Forex market. If this is the amount that will be needed to stabilize the Yen, it will increase the debt burden by 10% and Japan already has the highest debt ratio in the developed world with over 220%.

The question that remains is: can Japan realistically stop the Yen from appreciating?