On the Yen Intervention, plus: Bonus Question!

Bruce Krasting's picture

I have not seen a “hard” number for the amount of intervention by the
BoJ on September 15th. The talk was that about Yen 2 trillion ($24b) was
sold for dollars. My own checking around confirms this range of
numbers. If anything, I think it could have been less than $20b. I would
appreciate any better estimates if people have them.

$20b sounds like a big number. On 15/9 it was. The BoJ got a big bang
for their buck. 2 big figures in a short time. The even better news was
that the 85.5 level held for two whole days!

Phooey! $20b is chump change in the FX market. By way of comparison
consider what the Swiss National Bank has done just this year. They
increased Euro reserves by ~$75b worth in an effort to contain the
rising CHF. The intervention failed miserably. The SNB threw in the
towel. The EURCHF collapsed as soon as the “We Quit”
sign went up. The Swiss intervened to the tune of nearly 20% of their
annual GDP in this busted effort. The market ate them alive and made a
fortune in the process.

I am not sure that comparing GDP and currency intervention leads to any
firm conclusions. But it is worth noting that the Swiss economy is about
a ½ trillion while the Japanese GDP is 5 trillion. Does that mean that
the BoJ will be forced to intervene to the extent of $1T (20%) before
they realize the effort is futile and they too throw in the towel? I
think not. I think the threshold of pain on this is a much smaller
number. My guess is that when/if intervention approaches $200b they will
be forced to quit.

$200b is an amount that could be positioned by just the big hedge funds
and market makers. The real significant supply would have to come from
global reserve holders. Specs alone will not bust the BoJ. Real money
movements could.

At some point in the not too distant future the following could happen:

The BoJ will advise the interbank players in Tokyo that they are willing to buy $5b against the Yen as public intervention.

The central banks of Brazil, Korea, Mexico, Russia, Saudi Arabia, (etc.) could all say, “Hey! That sounds good. Bernanke's trying his best to put the buck in the crapper. We have $5b to sell at that price”.

We have seen that when a central bank becomes a size buyer of an asset
that is in very large supply (and that no one really wants) the demand
that they create is overwhelmed by the supply that is revealed.

The BoJ is well aware what happened to Switzerland. They know their
“ammo” is limited. They must use their intervention dollars wisely. They
must play defense. They have to defend a given level and then back off
to defend a new lower level. They can’t say, “We will buy as many dollars at it takes at 84”. If they did something dumb like that the market would call their bluff, and eat their lunch.

Bonus Question

I am not wise enough on matters of Japanese politics to answer this. But
I will pose the question in the hope that someone has a thought. Some
background:

-A read of the weekend Japanese newspapers confirms that the release of
the Chinese fishing boat captain was (and still is) a very big story.
Japan Inc. seems pissed.

-There has been no tit for tit reversal by China of its decision to end
exports of rare earth metals to Japan. Keep in mind you can’t make a
Prius without this stuff.

-The diplomatic issues between China and Japan are not to be scoffed at.
This is the big leagues. It is hard to see the outcome. But it is easy
to see that China will win and Japan will lose. China has all the chips.

-Japan has lost (or is losing) a friend. In this matter they need the help of their “true” friends. It is unlikely they will take hostile actions against their “friends” while they are fighting a war of words with China.

Connect this to FX

-Intervention is a hostile act. It is base protectionism. It is a beggar
thy neighbor policy. If the BoJ continues to intervene to support a
weaker Yen it is a certainty that some Congressperson and or Senators is
going to cry foul. This is even more likely to happen given that we are
six weeks away from an election and protectionism is selling well this
year in America.

-The BoJ can intervene as they wish. But I do not believe they would do
it in a vacuum. The decision to intervene is highly political. Active
and continued intervention would require a broad base of consensus.
There is no evidence that such a consensus exists on any issue in Japan
today.

-Japanese leaders are well aware that the US does not condone currency
manipulation. Especially when that manipulation hurts the US
domestically. Look how far we have gone to push the Chinese on this
issue. In a different, but ultimately similar way, the Japanese are
doing to the US what the Chinese are. Manipulating terms of trade. The
fact that the US Treasury has refused to participate in any Yen
intervention speaks for itself. This policy is not in the US best
interests.

-Japanese leaders (and most importantly Shirakawa at the BoJ) are well
aware of the risk of bad press and a backlash from the US on the
currency issue. They know they do not want to wage that battle while
things are so unstable with China.

The Question(s)  (finally)

Given the foregoing thoughts, will the BoJ risk a political blowup with
its closest ally over the currency market? Or will they back off and
make an orderly retreat until the China issue blows over and DLRYEN is a
lot lower?

Answer that one correctly and you will get a bonus….

Shirakawa’s words from this weekend.  Does this sound like he is drawing a line in the sand? I think not.

We are ready to implement appropriate action in a timely manner if judged necessary.