I have to admit to have been more than a a bit stunned by one of the storms that hit this week, that many might not have noticed. No, it was not the tornado that landed in New York City on Thursday night. Nor was it one of the season’s hurricanes that has been roiling from the southern Caribbean through the northern Atlantic, the latest of which seems to be targeting Bermuda. It happened in foreign exchange markets on Tuesday evening, New York time; Wednesday early morning Asia-Pacific time. It happened just after what is known at the Tokyo fix (about 9pm, daylight saving time, when the foreign exchange rate is established for the day by the banks for their customers). The action afterwards did fix a lot of traders. The Japanese government had had enough of their currency getting stronger, while their economy seemed to be remaining awfully weak. The Yen had been rising against the US dollar (by about 50 per cent) and other currencies for most of the past three years. This was making the Japanese economy less competitive, and most of us know that Japan thrives on exporting. Well, it seems that the line in the sand was reached on Tuesday, when the US dollar rate fell to about 82.90, a 15 year low. Out came the foreign exchange market equivalent of the Samurai sword and it cut with force and ferocity, as the Yen was sold vigorously to take back about 3 percent over the course of the whole trading day, with the Yen selling totally between US$20-25 billion according to various reports. Since that surge, the level has stayed about stable. All that buying of US dollars had effects across many currencies, and gave the greenback a bit of a boost just when it needed a little shoring up. The Japanese yen to intervene was back for the first time since 2004.
Weeks of jaw boning about willingness to take vigorous or decisive action to stop a too rapid move in the Yen had not stopped traders from buying more of it. So, time to show them that all that talk was not just hot air. The interesting thing at first was that Japan’s ruling Democratic Party had just had a leadership election and the winning candidate was Prime Minister, Naoto Kan, who had been staunchly against intervening, while the loser, Ichiro Ozawa, stated clearly that he would intervene. So, the decisive action was perhaps a way of showing the party that despite previous comments decisive action to deal with the rising Yen–which is a concern to many Japanese–was still an option (see The Economist). A recent government survey suggested many Japanese companies were considering moving production overseas if the yen stayed high, casting a shadow over the nation’s recovery.
The history of intervention is not one that reeks of success. The most recent bout was over the past two years or so, when the Swiss authorities tried to counter a strengthening of their Franc, especially against the Euro, which was hampering much of its trade with the EU. The central bank would periodically come in and buy boatloads of Euros to push the rate, and it seemed that they had drawn a line in the sand. Then, having defended that, the market came to test the resolve again, and again. While it seemed that things had gotten stable, back came the market and up again went the Swiss Franc. To go way beyond the line in sand and much deeper, almost to the core of the Earth in some metaphorical sense, reaching new and newer all time highs against the Euro. The Swiss central bank had piled up billions of Euros and in a losing cause, and when it tried to offload these it was at much worse levels.
Japan has decided to go it alone with its intervention and that has already elicited criticism from US and European official. Single-handed, as opposed to coordinated, intervention rarely works for long, and often tends to counterproductive.
The theories about why the Japanese have acted now are also connected to some geo-politics and some geo-economics. The problem is really the Chinese. They need to let their currency strengthen substantially but instead are tickling it up by flea hair amounts, and for a long time buying tanker loads of US dollars and Japanese bonds, and really getting the benefits of keeping a weaker-than-warranted exchange rate. The pressure has thus fallen on the Japanese. But, Japan’s actions may indicate to central banks in the region that they have a stronger argument to weaken their own currencies and boost the competitiveness of their export sectors, complicating efforts to encourage China to loosen its currency.
As Nouriel Roubini has commented this week, most major economies want a weaker currency. Of course, that’s not possible. As one trader said to me during the week, the Japanese wanted to scare the market, and they probably did. But, fear of intervention is not what drives the direction of foreign exchange rates if there a good reasons for them to go in a particular direction. The dust will settle next week as foreign exchange markets digest the mega move, and see if more of the same is indeed on the docket.