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Japanese Yen: G7 Intervention vs Laissez-faire
By Dian L. Chu, EconMatters
The world's fifth-largest 9.0 magnitude quake and the resulted tsunami not only devastated Japan, but also wreak havoc in the Japanese stock market. The worst two-day rout in 40 years caused a 6.2% drop in Nikkei share index, wiping £90 billion (roughly $145.45 billion) off stocks and shares traded there, reported The Telegraph.
Separately, Financial Times quoted EPFR, a data provider, that Investors pulled $8.2 billion from equity funds, and $4.3 billion from money market funds, in the week to Wednesday, March 16. That in turn dragged share prices to a six-week low in many countries.
BOJ Mass QE Post Catastrophe
To stabilize the market, Bank of Japan (BOJ) pumped a record 15 trillion yen ($183 billion) liquidity, which is the biggest amount ever made in a single transaction, and the bank has also announced steps to ease monetary policy, and enlarged its asset-purchase program.
The tsunami and earthquake is expected to be the world's most expensive natural disaster with preliminary predictions that the estimated total economic loss is to be between $200 billion and $300 billion, while costs to the insurance industry could exceed the record $40 billion-plus claims from Hurricane Katrina.
S&P Downgrade & IMF Warning
The big problem is that Japan is already in a lot of fiscal trouble before the quake. In January this year, Standard & Poor's cut Japan's credit rating one notch to "AA-" from "AA", citing high debt and government’s lack of a "coherent strategy" to tackle the debt problem.
Then, just weeks after the S&P downgrade, International Monetary Fund (IMF) warned that Japan's outstanding debt and fiscal deficit "are not sustainable over the medium- and long-term." At the time, the IMF does not believe an imminent European debt like crisis, mainly due to Japan's high savings rate.
Debt Trouble Could Deepen
Japan has been plagued by a decade-long deflation, and has the highest debt to GDP ratio of any developed nation (See Chart). Although the majority of Japan’s debt is held internally, this unprecedented disaster in Japan’s history could make the country’s situation that much worse with global implications as Japan is a significant trader partner with many countries around the globe.
Investors worries drove five-year credit-default swaps (CDS) on Japan’s government to a record 130 bps on March 17, but dropped back down to about 105 bps on Friday, March 18 as Japan is working on containing the radiation leak. Nevertheless, it is fair to say there’s a very real fear that the country’s economy could plunge further into a recession, and may even face a near-term sovereign debt crisis situation… in a worst case scenario.
Yen Spiked to Record High
With the unprecedented liquidity injection in aftermath of the quake, tsunami, nuclear crisis, combined with existing high debt levels, you would think the Japanese yen currency should weaken considerably, if not in a complete short-term panic landslide.
Yet quite the contrary, the yen soared to its highest against the US dollar since the World War II reaching Y76.25 on March 16. Yen’s resilience could be attributed to the following major factors:
- Speculators front running the anticipated repatriation of funds from Japanese investors and firms to fund reconstruction, and damage loss claims
- Some actual repatriation of funds by the Japanese investors and corporations
- Global risk aversion resulting in Yen carry trade unwind
- Stop-run by speculators busting through previous support levels.
A Strong Yen – Bad News Japan
A surging yen currency is certainly the worst news for the country’s export-dependent economy. Even if the loss from quake and tsunami does not drive Japan into another recessionary cycle, the currency strength would be the final nail in the coffin.
G7 Yen Joint Task Force
This dire predicament of the world’s third largest economy is enough to get the central banks of the G7 to step in and initiate a coordinated yen intervention not seen for over a decade.
While the actual amount of the intervention is unknown, Financial Times noted traders estimated the BOJ sold Y2,000bn ($25 billion) against the dollar on Friday, March 18, similar to the record Y2,125 billion it sold to weaken its currency last September, while the Fed and the Bank of Canada confirmed that they had been selling the yen too.
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And the two charts (above and below) from Financial Times illustrates that efforts from the ‘G7 joint task force’ sent yen tumbling to around Y81, along with a calmer global equity markets.
Yen Target - Y83 or Volatility?
Fumihiko Igarashi, one of the two senior Japanese vice finance ministers, did not rule out further interventions when he told Dow Jones Newswires Friday his dollar-yen target is around Y83, the levels prior to the massive earthquake and tsunami on March 11. But ministry officials reportedly have privately emphasized that their target is volatility, not a specific dollar-yen level.
Increasing Net Longs on Yen
Meanwhile, WSJ.com said data from the Commodity Futures Trading Commission released on March 18 showed that traders had $4.6 billion in net "long," or bullish, positions in the yen as of Tuesday, up 84% from a week earlier.
So, it seems regardless of volatility or a specific exchange rate as the target, more rounds of intervention could be expected given the increasing net long positions on Yen, the fact that Yen actually bounced back up on fresh buying in the middle of the G7 mass selling, and that Japan is a ‘Whale’ when it comes to currency intervention. In 1995, Japan spend Y5, 000 billion for the whole year, and in September, 2009, it sold Y1, 000 billion in a single day.
G7 Intervention vs. Laissez-faire?
According to Nikkei.com, some traders speculate that Japan might need to handle interventions alone because other G-7 economies just wanted to ease market volatility, and will unlikely step in as the market stability seems to have restored.
Although most central banks, including Japan, have had a dismal record when it comes to currency intervention; however, this time around, there seems to be a few more rounds left before we know who eventually prevails in this grand currency match of Laissez-faire vs. Intervention.
Related Reading:
Japan Earthquake: Impact on Crude Oil, Fuel and Nuclear Power
$5 Gasoline By Japan Quake?
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Dollar = reserve currency because it is accepted by oil producers. Oil producers accept $ because U.S. arms deals and military presence. U.S. military presence made possible by dollar being world reserve currency. The cycle ends when the dollar starts to fall.
are we getting set up for a global currency?
http://nakedempire2.blogspot.com/
I will call the beginning of massive global economic contraction, and the advent of the next Great Depression, right here, and right now, for some of the reasons highlighted in this New York Times article (but for many other reasons, not the least of which is the affinity of central bankers for meddling with & distorting markets):
Crises in Japan Ripple Across Global Economy By MICHAEL POWELL 13 minutes agoTsunamis, radioactive plumes, Middle East revolutions and a new round of the European debt crisis could derail a tenuous bounceback.
Living in Canada, we've always been told that we shouldn't have too strong a dollar because it hurts exports. All I know is that stuff always costs more.
That is what the keynesian retards have been telling us but it is bullshit. Funny how the public fights for better wages but is convinced that a high currency is a bad thing. The more the CAD rises, the higher wages become.
How clueless can one population be....
What's the current half life of the dollar I wonder.
From Bill Buckler over at The Privateer:
"Here's a whimsical scenario for you. Can you imagine a circumstance in which the government money managers and central bankers from the G-7 nations became so concerned about the flagging prospects for Gold (or Silver) that they had a conference call and decided to get together and do something about it? No? You're not alone, we can't either.
That is of course precisely what they did at the end of the week in response to the wild rides being taken on the paper markets, specifically the markets for paper money. According to Bloomberg, US Treasury Secretary Geithner got a "request" from the Japanese Finance Minister and was then instrumental in helping to arrange the intervention. How about that. On March 18, all the G7 central banks stepped into the fray and the US Dollar jumped 3.1 percent against the Yen. The problem is that it didn't fare quite so well against any other major world currency. On the same day, the US Dollar index (USDX) fell to a brand new 52-week low. The US Dollar certainly rose strongly against the Yen, but the Euro positively SOARED. It was up 1.0 percent against that "soaring" US Dollar. Most of the other major world currencies were too.
China is not a G-7 nation, even though it is part of the G-20 and has the second largest single nation economy in the world. We wonder if the same urgent intervention would have been deemed so vital had it been the Yuan and not the Yen which was soaring against the US Dollar.
It gets even more hilarious. For the best part of two years now, the US government has been chastising China for "manipulating" their currency to keep it from rising against the US Dollar to the extent that it "ought" to. Here's what Japanese Finance Minister said when he was interviewed in Tokyo on March 18. "We won't manipulate it, but we hope that the Yen goes back to where it was before the earthquake." When the Chinese central bank buys Dollars to slow any rise in the Yuan (and to allow the US Congress to go on spending), this is called "manipulation". When the G-7 gets together to sell Yen, it is nothing like that. And besides, it was NECESSARY to force the Yen down. To do nothing would have risked the global carry trade and without that, nobody but governments would be borrowing any money at all. And what would THAT have done to the global credit-based monetary system?"
Any thoughts on this, Rocky?
http://www.zerohedge.com/article/mega-merger-monday-%E2%80%93-t-can-be-%...
And this;
by RoRoTraderon Mon, 03/21/2011 - 16:59
#1083219
Phil, can you clarify the above in the context of your USDX chart and calling for the dollar to be absolutely hammered for the next 2 months?
Thanks.
It is the US and the FED that are manipulating the dollar. The US is the currency manipulators, not China.
Originally China peged to the dollar for stability, nothing else. China has done the same thing it has always done.
I disagree that it "makes no logica sense." If the US is at or near default what currency does one trade in? For some time it has been the yen--and needless to say "they have the fewest war issues" of all the "Great Powers." In short--no modern industrialized economy has had greater respect for "paying your own way" in this world than Japan. Rather than seeing the surge in the yen as some "ideological" struggle I see it as a wilingness to "do what it takes" to still pay the bills in SPITE of the obvious reality of a "nation devoid of natural resources." Having said that..."this is the big one" and the failure of authorities to truly BE open i think is having dramatic and negative consequences as "understandable" or "normal" relative to dealing with anything having to do with "nuclear" is. In short "how big of a problem is the destruction of these six nuclear reactors"? Obviously saying "this is worse than Three Mile Island" is not enough. What is it then since we can all see that in theory this could be FAR worse than Chernobyl given the proximity to I guess what could be called now "former population centers"--but still--population centers i would hope "wanting to be so again."
So Japan is always there to print and pay its bills. I see...
Ok deflationist, the next time the Euro zone gets into big trouble, go long Euro's, buy as many as you can.
Wait a minute.... Didn't the Euro fall when Greece was on the cusp of default last summer ?
never mind...
the japanese people invest their yen in higher yeilding currencies and bonds. then crap happens and they sell it to bring it home to buy things. It's a carry currency. not really like the euro
No,
the Japanese invest in Japanese bonds. Most of Japanese debt is held in Japan.
better off shorting the govenment bonds rather than the yen.
so now short the debt that backs the currency.
fuck are we ever making allot of sense here.....
If this question is other than rethorical, I would say there really is no contest. When it comes to markets nowadays, there is no such thing as laissez faire.
Reports of the Chinese housing market starting to turn down
http://nakedempire2.blogspot.com/
It still makes no logical sense that the Yen jumped like that, no different then the US dollar in 2008.
Beats me, maybe there is allot of women trading out there. That is the only way things could look this ass backward.
Whoa feller, unless you are gay, better nip ( pun not intended ) that kind of talk in the bud.
you must be whipped.