Beware: the Japanese could intervene again

THE famous samurai and military strategist Miyamoto Musashi once said: “If the enemy thinks of the mountains, attack like the sea; and if he thinks of the sea, attack like the mountains.” The Bank of Japan’s (BoJ) strategy to keep the yen weak against the dollar, however, is probably not that sophisticated. It intervened by pouring money into the Japanese economy last time the yen reached a record high.

This is becoming a more pressing concern for traders because the yen seems to be on an irrepressible climb. Even the flood into the dollar haven in reaction to the events in Egypt and Japan’s rating downgrade last week didn’t stop the dollar sinking to ¥81.46 at yesterday’s UK close.

The a managing director of the Bank of New York Mellon Simon Derrick says he thinks an intervention is coming soon and will be implemented at the ¥80 psychological level that spurred the BoJ into action last time. The market’s move out of the dollar on the weekend show that: “Traders don’t want to be in the dollar for long when the Fed has such a loose monetary policy.”

Duncan Higgins, a market analyst at Caxton FX, agrees: “Even against the yen, the US dollar is struggling with safe haven flows preferring to head to Japan.” This could push the yen up faster than expected.

Technical analysts such as Michael Hewson of CMC Markets says the “feebleness of the rebounds” means that the current ¥81.75 resistance level won’t last long (see chart).

Even the hit the yen took from Japan being downgraded had limited impact. Higgins says: “We saw a typical knee-jerk market reaction. There was initially a sharp sell-off in the yen but these losses were recouped in full the next day with the market concluding that no new insight about the Japanese economy had emerged.”

But some have questioned whether the BoJ will intervene again if the yen regained strength so quickly, deeming the previous action unsuccessful. Derrick thinks it will: “You have to think about it in relative terms. It has actually been quite effective. In comparison to the euro, the yen’s value has remained quite low. Euro-dollar was $1.27 at the time of the last BoJ intervention, it’s $1.37 now.”

So traders could take the strategic advice that Musashi would give: to expect the unexpected, but then again traders might find that there are easy profits to be made from betting on the BoJ reacting predictably.