Wednesday, September 15, 2010

Japan Update - The Yentervention

The Bank of Japan today intervened in the forex market, selling Yen (JPY) as the exchange rate entered the psychologically important 82 yen zone. After the intervention the USD strengthened against the JPY, with the USD/JPY rate rising to about 85.50. The move follows repeated threats by the Bank of Japan to take "decisive steps" if necessary. Japan's Finance Minister, Yoshihiko Noda, noted that the impact of the rising Yen on the economy could no longer be ignored - he also noted that Japan had acted alone in the move. So what does this mean? and what does it signal?

In the short term it probably means more volatility in the JPY, and possibly a continuation of the artificially induced pullback. As Japan is very much a trade driven economy, the exchange rate has a material impact on export competitiveness and thus growth in exports (note exports have still not recovered to pre-crisis levels in Japan).

In the medium to longer term though currency intervention often tends to have the effect of blowing air into the wind; currency intervention has its place at the margins and at the extremes, where it can be quite effective - or as a trigger point. But if the fundamentals suggest the exchange rate should be trending in a certain direction then intervention is liable to backfire.

The move also sends some strong signals about the relative levels of desperation felt by the Ministry of Finance and the Bank of Japan by extension. It means they are getting nervous about the state of the Japanese economy, and maybe they should be. The deflation problem is still there, so is the debt problem, growth has rebounded - but for how long, trade has rebounded - but the exchange rate issue has played a part; global demand will also come into the mix.

So what's the conclusion? Well for one the "yentervention" probably wont work long term, and probably wont have the intended impact of boosting exports. And on the signaling side, well, Japan may well be going the way of the US and we may start seeing double on the double-dip front!

Econ Grapher Analytics
Global View Forex

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