THE Japanese central bank, the Bank of Japan (BoJ), has been locked in a seemingly futile battle to weaken its currency, the yen. A strong yen is seen as damaging to Japanese exporters by reducing their competitiveness overseas and eroding the value of repatriated earnings. But despite its past failures, it is likely that the BoJ will intervene again. The question for traders is when, and by how much?
On 31 October, the BoJ intervened to weaken the yen for the third time this year, with finance minister Jun Azumi declaring that he would continue to intervene until he was satisfied. It is estimated that the initial move cost the BoJ ¥40 trillion (£327bn), and a further trillion in the three days following that. JPMorgan Chase reports that the Japanese government is exposed to a potential ¥40 trillion of losses this year from its attempts to weaken the yen.
But despite record levels of yen repatriation by the Boj, interventionary policies have failed to gain any lasting traction. The problem is that it is difficult to change the tide of currency flows with intervention in the FX market alone. Unless there is a shift away from the current climate of risk aversion, it is difficult to imagine that we will see an end of global haven flows driving up the yen.
Much as Japan has seen its exporting economy hurt by an overvalued domestic currency, earlier in the year, the Eurozone crisis caused huge haven flows into the Swiss franc, overheating it to a level that the Swiss National Bank (SNB) deemed to be unsustainable, and damaging for Swiss business.
On 6 September, the SNB retaliated by announcing that it would put in place a floor on the Euro-Swiss franc exchange rate at SFr1.20 – the SNB announced that it was prepared to buy foreign currencies in “unlimited quantities.”
To date, the decision taken by the chairman of the SNB, Philipp Hildebrand, has been seen as a policy success. As you can see from the chart, below left, euro-Swiss franc has been successfully maintained above the SFr level, despite continued market volatility that would otherwise have caused the franc to appreciate. Compared to the moves made by the BoJ, the Swiss have been transparent in their motives and in their objectives. When they announced their plan, they told the markets just what level they would defend and what resources they had available to do so. In comparison, the BoJ interventions do not appear to be part of any coherent plan – simply a reaction to the yen triggering some pain for Japanese business interests.
With this in mind, could Jun Azumi follow in Hildebrand’s footsteps? He could make a bold move and declare that he is prepared to place a floor of ¥76 under the dollar-Japanese yen exchange rate and bankroll the policy to the death.
Ironically, one of the biggest stumbling blocks to Japan mimicking Switzerland is the success of the SNB’s move – with the floor underneath the Swiss franc, the dollar and the yen are the only anti-cyclical options available for safe haven investors.
From a political point of view, Japan does not have an independent central bank. Whereas the Swiss are free to print francs to their heart’s delight, Japan’s currency policy is dictated by the Ministry of Finance. The Japanese FX market dwarfs that of the Swiss, and after the huge losses that have been sustained to date by the Japanese treasury attempting to weaken the yen, the chance of the Ministry of Finance writing a blank cheque for the BoJ to intervene is fairly slim – though not nonexistent.
As the BoJ ends a two-day policy review today, it is highly unlikely that they will make any moves on the yen, especially after a programme of easing in October to bolster its asset buying fund.
According to Stephen Gallo, head of market analysis for Schneider FX, any move is more likely to come at the end of the month as Japanese business repatriate yen for interim profit reporting or when the Japanese financial year ends on the 31 March.
Until then, dollar-yen provides a good range-trade opportunity, as the market tries to second guess the BoJ.