Speculators may be the only party to gain from yen sales

SINCE the events that struck Japan last week, the G7 grouping of countries, of which Japan is a part, has come to its aid by selling reserves of the yen. But was outside help unavoidable in order to push down the yen?

The G7 has made a sizeable bet that it was. Estimates are that since Friday of last week, G7 nations have sold a total of ¥530bn to try and keep the yen low against its all important dollar, euro and sterling pairs, in a bid to help its exports. Analysts estimate that the Bank of Japan (BoJ) was prepared to sell around ¥2 trillion in its desperation to keep the currency low after the yen spiked to ¥76.25 against the dollar, the highest exchange rate since World War II.

As with the financial crash in late 2008, the numbers seem so large that it may appear that only a coordinated multi-lateral approach by central banks could work. David Buik of BGC partners certainly agrees: “The G7 nations absolutely have to intervene. It is incredibly important to protect Japan’s economy. As a result of central banks stepping in and selling the yen, it has dropped from 75 to 80.9 against the dollar. Should the yen drop back to the 76-77 levels, it would certainly benefit from another intervention. Central banks should intervene because a strong Japanese economy is good for everyone.”

Still, with every bailout, there is always a price to pay. With the European central bank (ECB) acting as a life support machine to countries closer to home and other central banks facing problems of their own, why would Frankfurt’s bankers want to make the life of the Eurozone’s exporters more difficult? Michael Hewson of CMC Markets argues that there was no alternative but to bail out the yen, but that “the last thing the periphery Eurozone countries need is a strong euro against a country like Japan. They want a low euro, not a high one. Also, there is only so much that the G7 can do. They have fired a shot across the bows with this intervention. If the yen should drop below 80 again we could well see a renewed volley, but then Japan is going to have to rebuild itself.”

Nick Beecroft, senior market consultant at Saxobank, goes even further. He argues that the G7’s intervention was a mistake: “My immediate reaction is that intervention by the central banks is the worst thing to do. It has got to the point where we are just kicking a can down the road with one intervention after another. It may be a painful process, but at some point economies are going to have to just face the pain of a complete deleveraging process.”

Pointing to the flexibility of the Japanese economy as well as its ablility to cope with a strong yen (the ¥80 level against the dollar of 1995 equating to around ¥65 today), George Tchetvertakov at Alpari backs up the sentiment expressed by Beecroft. “The intervention is not the correct thing to do. Firstly, intervention fails to prevent rises in the currency. If you look at the mid-nineties and 2003, intervention failed and the yen rose despite the BoJ’s efforts.

“Secondly, from a psychological point of view, if you admit to the market that there is something wrong then you are going to cause trouble for yourself. What we are seeing is that speculators are taking a short position on the dollar-yen at every development, knowing that the BoJ is prepared to step in whenever the yen dips to the 80 mark. Rather than the central bank intervening in the market place, it should instead create some sound policies that will allow Japanese businesses to recover.”

Despite whisperings among insiders that the BoJ has been defensively intervening in the yen, quietly selling off the currency whenever it dipped near to the ¥80 mark, the knowledge that the BoJ is prepared to sell has now been made very public over the last week. Investors would be wise to take positions accordingly whenever the yen heads towards this support, waiting for the selling and cashing in – whichever views they may hold on the wisdom of the intervention.