Japan’s Secret Yen Interventions Could Be Template For Future

February 23, 2012 at 04:35


The Bank of Japan’s disclosure Tuesday that it secretly sold yen for several days in November has been followed by relative stability in the yen’s exchange rate. That has prompted analysts to suggest an invisible-hand approach might be a better alternative to massive interventions that ultimately fall short.

On Oct. 31 the BoJ — acting at the behest of the Ministry of Finance, which sets currency policy — entered markets to sell yen after it surged to a record high against the dollar. But analysts were caught off guard by MoF’s admission that between Nov. 1 and Nov. 4, it conducted an additional $13.3 billion worth of “stealth intervention” by using a limited number of commercial banks sworn to secrecy.

Japan’s clandestine dollar buying may have helped stabilize the yen. While the greenback has listed within a tight range of about four yen since October, it has yet to breach its record low at Y75.31. The narrow trading band has some market observers speculating the BOJ might still be actively managing its currency without the market’s knowledge.

Although it won’t show up in BoJ data for at least another few months, the compressed trading band “suggests the BoJ and MoF are still manipulating the market,” says Michael Woolfolk, senior currency strategist at BNY Mellon in New York.

Of all major economies, Japan is the most aggressive about using intervention to cheapen its muscular currency. The country’s forays into FX markets are nearly as frequent as those of the central banks of Brazil, Chile, and Peru, which sell their currencies to prevent them from undercutting exports. And in terms of its the absolute amounts bought, Japan dwarfs those smaller countries, and its $1.3 trillion in foreign-exchange reserves are second only to China’s $3.2 trillion.

The yen is being propelled by a flight to safety stemming from Europe’s debt crisis, and Japanese exporters’ constant need to recycle dollars and euros made overseas back into yen. That means Japanese authorities are constantly fighting a strengthening yen. Within the 71 trading days following Japan’s October intervention, dollar/yen has ventured above the Y78 level on fewer than a third of those days, and has traded above Y79 on only one occasion.

Market observers say using clandestine yen selling is likely to be more successful for the BoJ than public intervention when the market is so determined to buy yen. Because the public efforts have been met with failure, analysts say, Japan can save itself both money and credibility by conducting forays into markets that don’t draw public attention. Analysts also point out that large-scale, public purchases of dollars merely deliver the yen at cheap levels to those who would buy it anyway.

“Central banks know they cannot change the fundamentals. They can only slow … appreciation of the currency when they step in, and generally that will only work in a short time frame,” said Andrew Busch, global foreign exchange strategist at BMO Capital Markets in Chicago. Given that current trends augur more yen strength, “Intervening quietly is the best way to do it,” he added.

In 2010 the Swiss National Bank bought billions of euros to rein in the franc, which left them saddled them with a massive loss on their reserves as the franc continued to shoot to record highs. That forced it to take a different approach in 2011, when the SNB set a publicly stated target of CHF1.20 rate as floor for the euro. Since then, it has kept the euro floating above that level with only minimal purchases.

The record suggests the BoJ has been almost as ineffective in depressing the yen as the SNB was in softening the franc in 2010. After the world’s third largest economy was brought to its knees by the earthquake and tsunami last March, Japanese policymakers secured Group of Seven backing for a dramatic yen-selling effort that sent the currency soaring. But in the months that followed, dollar/yen set new record lows on two occasions — on Aug. 19 and Oct. 31 — underscoring how hard it is for a central bank to fight the market.

Whether or not that failure prompted a change in strategy, observers now know that the MoF shifted to a disguised intervention approach immediately after that big intervention. At the time it was harder to spot than the large-scale efforts that preceded it.

The question now is whether they have continued with this tack and will do so in the future.

Japan’s massive FX war chest means authorities have deep pockets they can use to introduce two-way risk to recalcitrant traders. Yet Woolfolk argues that the yen’s overall strong trend means the BoJ would be “fighting a losing battle” by intervening openly.

“Intervention is most effective when it’s unexpected,” he says. “Stealth would be the preferred route.”