Pushing yen down, Bank of Japan riles U.S.


By Ambrose Evans-Pritchard
The Telegraph, London
Wednesday, September 15, 2010


Japan has launched a huge intervention in the foreign exchange market for the first time since 2004 to stem the rise of the yen and head off a deflation spiral, prompting harsh protests from top US Democrats on Capitol Hill.

The move is the latest dramatic twist in a world where a growing number of countries are seeking an economic edge through "beggar-thy-neighbour" currency policies. It came as Congress held a hearing on China's yuan suppression amid ever louder calls on Capitol Hill for sanctions against Beijing and for pressure on Korea and other countries in Asia to halt currency intervention.

Sander Levin, chair of the House Ways and Means Committee, said Japan's action was a "deeply disturbing development. China is not the only country with a predatory exchange rate policy."

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The Bank of Japan intervened alone in the early hours, selling an estimated Y1 trillion. Finance minister Yoshihiko Noda vowed "bold action and further intervention if necessary."

The move drove the yen from Y83 to Y85.6 against the dollar, and set off a powerful bond rally. Tokyo's Nikkei index jumped 2.3 percent to 9,517, led by exporters. Mazda rose 6 percent, Sony rose 4 percent.

David Bloom, currency chief at HSBC, said Japan should step up action over coming days rather than dribbling out intervention as it did from 2003-2004, buying $350 billion of US bonds over 15 months. "They need to hit the market hard, fast, and furious, because as time goes on the effect will dissipate," he said.

Fiona Lake at Goldman Sachs said Tokyo was forced to act after funds seized on the leadership victory of premier Naoto Kan as a green light to buy the yen. "We would not rule out new lows in the dollar against the yen," she wrote in a client note, saying the US Federal Reserve is likely to outdo the Bank of Japan in the contest to see which can drive down its currency fastest.

Mr Bloom said unilateral intervention can work for Japan because it is trying to weaken its currency. Japan has "unlimited firepower at no cost." With core deflation at 1.5 percent, Tokyo has ample room to create money. The foreign bond purchases are "unsterilized," amounting to monetary stimulus. Bank of Japan officials dislike this policy but have acquiesced for now.

Mr Bloom said the real question is whether the world will tolerate intervention from a country with a trade surplus. "They may accept it now, but not six months down the road," he said.

Japan enjoys a cushion of goodwill as a close US ally. It is clearly intervening to stop its currency rising to extreme levels as a result of safe-haven flows rather than to gain export share. "They can argue that they are doing this for the greater good to prevent financial disruption, which nobody wants right now," said Mr Bloom.

The country is acting much like Switzerland, which has intervened massively this year to stem eurozone flight into the franc. The Swiss authorities seem to have abandoned the struggle after spending 80 billion francs in one month and ultimately accumulating reserves equal to 40 percent of GDP.

A top official at Japan's cabinet office let slip that Tokyo had set a floor of Y82. Tohru Sasaki at JP Morgan said it was a "big mistake" to talk numbers since this invites speculators to test the level. "It is inevitable that the yen will strengthen again," he said, arguing that intervention could not change the overall direction. He expects the yen to break below Y80 once the shock effect fades.

Data from the Bank for International Settlements shows that yen transactions in the exchange markets amount to $740 billion each day. The wall of money is overwhelming.

Simon Derrick, currency chief at the Bank of New York Mellon, said Tokyo has a battle royale on its hands. "The authorities are not fighting speculative forces here, and the flows into the yen are being driven by external events rather than anything within Japan," he said.

Mr Derrick said the surge in currency since May is a direct result of the eurozone debt crisis, which caused a flight of global capital from the Club Med bloc. Japan has become the last sanctuary by default. "There has been a marked decline of faith in both the dollar and the euro as stores of value," he said.

China's central bank bought record amounts of Japanese debt in May, June, and July. Some believe that China’s purchases forced Tokyo to act. Fortuitously for Beijing, Japan's intervention muddies the political waters and makes it much harder for the US the marshal global condemnation of China's very different yuan policy.

Japan's move adds liquidity to the global system. Its actions from 2003-2004 were a key factor in setting off the credit bubble, a trend later reinforced by an estimated $1 trillion of leaked stimulus through the yen "carrry trade." While Japan is a declining economic power, it still has $3 trillion of net global assets. Its actions quietly ripple through the entire network of global assets. Today's intervention may have greater implications for stock markets and commodities than might appear at first sight.

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