This week's MoF intervention in the FX markets, while not quite unprecedented (trailblazer Hildebrand aside), was certainly sizable, surprising, and potentially sustained - no matter how many times we were told by Mr. Azumi that he was 'watching' closely. Our question, and one discussed in a Bloomberg story this evening, is it possible to change the course of USDJPY via intervention - and perhaps more presciently (given growing global interest in capitalist/Keynesian spending escalation), was the expected $512bn loss that the country faces on these FX positions alone worth it? Tohru Sasaki, of JPMorgan's Global FX Strategy group, address his concerns at both the unilateralism and the worrying perspective that the Japanese might try to emulate the SNB - which he sees as almost impossible to achieve - especially since the ceiling on CHF leaves JPY and USD as the only anti-cyclical currencies.
“It’s difficult to change the trend of the currency market. Even if the action can stem the currency’s gains temporarily, the yen will eventually appreciate.”
We speculated yesterday on the coincidental 'pegging' style of the intervention yesterday both to CNY and USD (obviously intertwined) specific levels with the view that perhaps a slow and creeping anti-Bretton Woods broken Nash equilibrium was happening as currencies were getting 'fixed'. Sasaki, of JPM, notes four reasons why this is unlikely to be successful/possible - although losing $512bn is always an incentive to double down?
JPM - Will The BoJ Tag Along With The SNB?
Conclusively, we do not think this [setting a ceiling on USDJPY] is possible for BoJ. We would put the probability of similar action at less than 5%. Here are the reasons;
1) Japan's FX policy is conducted by MoF, not BoJ. In Japan's case, MoF issues T-bills to finance JPY through the market which they then re-sell through the FX market. Therefore, if MoF conduct unlimited intervention, it means that the Japanese government debt may increase unlimitedly - something that the Japanese government really needs to avoid.
2) Because of this difference, it is difficult for Japan to conduct intervention in the forward market as the SNB has done before. If such action is to be perceived as a FX policy, it should be done by the MoF. However, MoF intervention in the forward market should affect interest rates and liquidity in the money market, blurring the border between FX policy and monetary policy. If forward market intervention is perceived as monetary policy, theoretically, the BoJ could carry this out. Even still, given the ample liquidity in the JPY funding market, it is difficult for the BoJ to justify the rationale of intervention in FX forwards.
3) If BoJ starts taking responsibility of FX intervention policy, BoJ can take the same actions as the SNB. However, the government is not happy with BoJ's losses caused by JPY appreciation. Even now, BoJ holds JPY5 trillion of foreign currency assets on its balance sheet. This is separate from MoF's official foreign reserve, which is more than JPY100 trillion. While MoF's official foreign reserve is currently suffering about JPY40 trillion of unrealized losses, MoF is not required to materialize these losses on its special FX account. However, BoJ will need to record the losses in the P/L, of which would eventually result in the reduction of government revenue. Indeed, BoJ has recorded JPY481 billion of losses from JPY appreciation in FY 2010. Due to these losses, BoJ's current profit decreased by JPY312 billion to a mere JPY54.2 billion during this period. As a result, the transfer of BoJ's profit to the national treasury also decreased by JPY305 billion to JPY44 billion. Given these conditions, there is no incentive for the government to let BoJ take FX risks instead of MoF.
4) Market size of the two currencies are completely different. According to BIS's Turnover survey, total daily JPY turnover in the FX market (including spot, forward and FX swaps) was USD694 billion in April 2010, which is about 3 times larger than that of CHF (USD238 billion). Although BoJ's balance sheet is about 6 times as large as that of SNB's, it is still risky for the Japanese government to conduct such a huge operation, especially more so until they are fully convinced that the SNB's bold action is successful even in the medium-term.
And so we are left with a major currency pair (USDJPY) that has retraced 38% of the initial intervention already, but has 'been' stabilized at around 78.2 (or 12.3 CNYJPY) for the last 43 hours does start to raise eyebrows - although as we noted - implied vol (chart above), which dropped dramatically (on expectations of a peg) has started to leak higher once again.