JPY Intervention, $512bn Losses Well Spent?

Tyler Durden's picture

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.

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NewThor's picture

They're going to need a bigger boat to float next time, Bitchez !

AldousHuxley's picture

The Bank of Japan adopted a new monetary easing framework in March 2001. Based on this, in a situation where there is little room for a further decline in short-term interest rates, the effects of monetary easing will necessarily be limited. The fact that economic activity has not been stimulated despite an aggressive increase in reserves
since March 2001 seems to be consistent with what such standard theory predicts.


from "One Year Under 'Quantitative Easing' " (2002) authored by Masaaki Shirakawa, central banker and the 30th Governor of the Bank of Japan (BOJ). He is also a Director and Vice-Chairman of the Bank for International Settlements (BIS)


Bernanke, are you listening?!!!

css1971's picture

Shouldn't that be "Twenty years under Quantitative Easing"?

bigwavedave's picture

I think people miss the point. They can print money to buy other peoples money. Inflation in Japan hasnt existed for 20 years. Yes its all a fiat shell game but those USD or EUR that Japan is adding to reserves (and the trade balance) will come in handy.  

winter is coming's picture

Start buying pms and old Deutsche marks

PY-129-20's picture

Still have some old Deutsche Mark. Looking at it with Sehnsucht (longing) as if it were an old love.

jmcadg's picture

Old DMs, good thought.

hambone's picture

spending "money" now that you never intend to repay in full or potentially at that really money or simply state sponsored digital counterfeiting?

And how much is the ECB spending to defend EU debt?  SNB? 

And Ameria it's trillions to push rates down, buy T's, MBS.

No markets left, just interventions.

Coldfire's picture

It's not like the BOJ can't just issue more yen to cover their "losses". And they will probably do this well past the point where markets determine that the currency is being debased and start selling yen. Of course the market will end up taking the yen far below the level desired by the BOJ. And the BOJ will not be able to unprint the already issued money. The BOJ's - and every other central bank's - fatal conceit is that it is capable of being the supreme arbiter of supply and demand at all times for the currency. Of course, no central authority could possibly ever have timely access to the information it would need to determine the market clearing rate at all times. Pity the BOJ. They are trying to maintain their fractional reserve banking system Ponzi and debase their currency to goose export performance. You would have thought that debt/GDP > 200% and profligate money printing would be enough to debase the currency. Amazingly, so far, no. Trading on this expectation has been a widowmaker. But the BOJ is determined to get it right and they'll probably "succeed" and destroy the yen in the process. Pure monetary barbarism (via Berkeley, of course).

Western's picture

I was going to ask, why isn't the BoJ just printing yen unlike their Zimbabwean/American counterparts.


Are you saying it's because the yen will overshoot and just become worthless?

UP Forester's picture

No one wants to use glow-in-the-dark shit-tickets.

WestVillageIdiot's picture

It seems that BoJ won't be happy until Americans can buy a Toyota for about six dollars.  How the hell does that make sense to anybody that isn't hepped up on mushrooms or just fucking insane? 

moneymutt's picture

What am I missing, if your currency is appreciating by a bigger a,out that you like, you just print money and spend it I the domestic economy on, say, cleaning up Fukishima, rebuilding tsunami ravaged towns. For an island nation, cost of imported raw goods is still reasonable but you balance that with the competitiveness of your exporters.

Only danger is over doing it, calibrating incorrectly. But with such a strong yen, that is less of a concern.

Snidley Whipsnae's picture

Are there any real success stories in currency intervention; ie, over the long run?

All central banks are intervening all the time in the relative strength of their currencies through monetization (QE), interest rate targeting, inflation targeting, unemployment targeting, manipulation of commodities mkts, manipulation of equities mkts, manipulation of bond mkts, etc, etc, etc...

Has the system of central banks proven that it is a better judge of anything than Mr Market?

All that I know for certain is that the US Dollar now buys about what a nickle bought in 1913.


LuKOsro's picture

Of course there are no succes stories in the recorded history of currency intervention.

WestVillageIdiot's picture

How do you think the Rockefellers, Astors, Rothschilds, etc. would answer that question?  Just ask Hank Paulson or Bernanke.  You would probably get a different answer. 

Temporalist's picture

The currency manipulation is not in a vacuum and these manipulators clearly don't care about the unintended consequences.


A Short Time To Go, For A Global Economy Far Far Debased

Currency Wars

bob_dabolina's picture

I get your point but the Japs are gona' protect their exporters. 

A good short would be /es @ 1265

Mike2756's picture

Might get there by the open, looks like everyone is front running he-who-has-to-print.

acttang's picture

I actually disagree with JPM analysis entirely. Japan being a nation awash in public debt, it has all the incentive to monitize this burden. If they could print trillion up trillions, they would substantially increase the supply of yen and effectively reduce debt load via yen inflation, and at the same time deal a fatal blow to the enduring strength yen bulls. Since there is no free lunch, the only victom would be their domestic savers, who over the past 2+ decades have been piling their life savings into jgb's.

WestVillageIdiot's picture

I think I tripped over about 12 such Japanese in the Financial District on Sunday.  They were all trying desperately to be the first to have their picture taken with their head near the bull's balls.  I still don't get why all of these Asian guys like having their pictures taken by the bull's balls.  Does anybody have an explanation? 

Vlad Tepid's picture

Same reason you see a bunch of goofy Americans trying to holdup the Leaning Tower of Pisa through perspective:  human immaturity.

Zer0henge's picture

BOJ already covered their shorts.  They made money on the trade.  They can do it again anytime.  They always cover immediately after the interventions.  Don't you people know anything?

Snidley Whipsnae's picture

Here is a 'year to date relative performance chart' that is very simple to read and comprehend. I find it useful to take a gander at this one occasionally...

It includes commodities futures, various currencies, etc. If you want to look at 'one day relative performance' or any other time period, just change the time scale.

Right now the JPY futures up 3.9% year to date.

In comparison gold is at the top of the chart and is up 21.9%, followed by heating oil, rough rice, feeder cattle, 30 yr bond, pork bellys, etc. At the bottom is cotton at -30.6%. A lot of information can be gleaned from this one chart.

WestVillageIdiot's picture

I still remember the dark days when I would still turn on CNBC.  It must have been about 2005 or 2006.  The first time I ever paid attention to the yen versus the dollar it was 124 yen per dollar.  Right now it is about 78.  That is one pretty damn big move.  How come their exports haven't risen in price more?  I find that even harder to understand. 

Let's say we pay $200 for a Nintendo system.  I don't play video games so I don't really know what they cost.  Five years ago that would have been 2,480 yen.  Today it is 1,560 yen.  How can they keep their costs from skyrocketing in dollars?  There is a reason I have the word "idiot" in my name. 

Dingleberry's picture

They outsuorce too. Japan has massive under-employment. I got a Japanese neighbor, and her kids can't get good jobs in Japan like the old days. And it will only get worse for them once they cannot keep interest at zero.  They are on a bridge to nowhere.

Snidley Whipsnae's picture

WVI... "Let's say we pay $200 for a Nintendo system. I don't play video games so I don't really know what they cost. Five years ago that would have been 2,480 yen. Today it is 1,560 yen. How can they keep their costs from skyrocketing in dollars?"


Export subsidies are often used by governments to increase exports. Exporters are paid a percentage of the value of their exports. Export subsidies increase the amount of trade and raise employment in the exporting country.

There used to be lots of haggling between governments about export subsidies, sometimes labled 'dumping', because it cost jobs in countries that gov subsidised products were being dumped into.

A government may intervene in the FX or foreign exchange market to lower the value of its currency by selling its currency in the foreign exchange market. Doing so will raise the cost of imports and lower the cost of exports, leading to an improvement in its trade balance However, such a policy is only effective in the short run, as it will most likely lead to inflation in the country, which will in turn raise the cost of exports, and reduce the relative price of imports.

This Wiki link explains the evolution of trade barriers, trade tarriffs, etc. It's not perfect but ok for a start. Note that during the run up to the US Civil War that there was a vast difference of opinion between the northern and southern states about trade tarriffs... also, FDR accused Hoover of 'causing the great depression' due to Hoover's trade policies.


Sequitur's picture

Phew Eurozone numbers absolutely atrocious. We are opening WAY lower.

Mike2756's picture

Wot numbers? Brents at 110.

jmcadg's picture

I thought Japanese manufacturers wanted the Yen back at 90.

It will be back below 75 soon. I wonder how much the SNB are having to pump into the system to peg the Swissie.

Admittedly a much smaller market, but no doubt costly.

melanie's picture

Sony will need EFSF money also? Made a loss of 252 B euro.

Blaming strong yen, floods in Thailand, and decreasing sales in Europe and US

MsCreant's picture

Breaking News: Reality has been cancelled until further notice. 

Announcement courtesy of the Central Banking System.

Mike2756's picture

Lotsa news out there, esfs bonds delayed, greek opposition not happy with the military shuffle.

moneymutt's picture

Ummm, do know the history of Icelands currency? It was way up before their banks crahpshed them, then they devalued their currency to get back on their feet.

Bolweevil's picture

Woohoo! I've been looking for a reason to reinstate 'pants optional Wednesdays'.

Snidley Whipsnae's picture

MsCreant... "Breaking News: Reality has been cancelled until further notice."


Or, until central bankers decide that morale among the consuming serfs has improved.

prophet's picture

"This business will get out of control. It will get out of control and we'll be lucky to live through it."