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BoJ: to intervene or not to intervene?
FX Week, September 3, 2001
The Bank of Japan faces a struggle to keep the yen below 120 as seasonal repatriation increases demand for the currency. Ken Agostino at Gain Capital weighs up the Bank's options.
As we approach the fiscal half-year end in September, it's not uncommon to see a demand for yen (repatriation). However, last week's comments by officials at the Bank of Japan (BoJ) about intervention in support of the dollar against the yen, coupled with market buzz that the bank was checking rates to hold the yen below 120, have created a new topic of interest among FX market participants.
Intervention has not been spoken of in recent times. While still extremely volatile, today's currency markets differ greatly from those in the 1980s when intervention was often used as a weapon by the major central banks around the world. The 1980's were a different and much more volatile time in FX. A time of double digit interest rates -- moving almost daily -- led to huge currency fluctuations. Since the current dollar-yen level (119.50 to the dollar on August 30) is not close to the yearly lows of 114.50 to the dollar in early February, there is a sense of caution among FX dealers about whether this intervention threat by the BoJ is real, and more importantly, how the bank would balance various economic factors in the region to produce a successful outcome.
Moreover, there seems to be a tone more of desperation than of definitive business action, as the Japanese economy and its accompanying equity market continue to languish over decade lows. Recent data from the government-reported figure for the month of July, shows that the unemployment rate in Japan is at 5%, an all-time low. This figure is the lowest in nearly 50 years since the statistics were first recorded in 1953. These numbers reflect great embarrassment to a nation that has taken great pride in having near full employment for their population.
The question remaining now is will a weaker yen have that much of a positive impact on the economy? A report released on August 29 on a Washington news service stated the trigger level for dollar buying is around 118.50 yen per dollar. Now, if we assume that intervention is both effective and in place, a move of say three big figures (118.50--121.50) would certainly be seen as "successful" -- this by definition of the ensuing move following the central bank action.
For the past year, the range of dollar/yen has been at 113.50--126.90. The moribund state of affairs in this corner of the world has persisted long before -- and most likely will continue after -- the exchange rate was reversed by such a small amount. This is not to say that a weaker yen would not be beneficial. It stands to reason that the ability to export products more cost-effectively should aid an economy, especially one so driven by exportation. The issue then becomes what dollar-yen rate will achieve this outcome?
Additionally, the Bank of Japan has another problem that could potentially arise. The FX market is a massive entity that, at times, has a motive of its own. For one reason or another, this behemoth-trading machine loves to test the resolve of the big players -- central banks and large hedge fund managers. Should the bank 'show its hand', and do so unsuccessfully, it not only fails to achieve its objective but also possibly fuels the market in the other direction.
The question then will arise as to whether or not continual intervention becomes necessary. A government that has endured its share of public embarrassments in recent years cannot afford another one.
On a larger scale, a move in the dollar/yen over 126.50 has not been seen since late 1998. The ability for the dollar to rally to these levels and beyond, either through dollar strength or aided by intervention, would be significant. We believe it is inconceivable to think that short-term or one-shot type of 'boutique' interventions can do any good. It would take massive, continual, and concerted intervention to have a major impact.
Additionally, such a concerted intervention effort would involve other G8 member nations. At this stage, those nations are focused on battling their own issues to view this as warranting such attention.
Ken Agostino is senior trader at Gain Capital based in Warren, New Jersey.
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