Leeds School of Business



Japan Intervenes in Foreign Exchange Market: September 15, 2010

Background

Over the course of the last 12 months, the yen has strengthened against both the US dollar and the euro. See Chart 1. The cause for this strengthening has generally been attributed to an ongoing global financial market flight to safety and specifically into the yen.

Chart 1: EUR/JPY and USD/JPY Exchange Rates

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On Wednesday morning, September 15th, around 10:30 am (Tokyo time) in Japan, the Bank of Japan conducted an intervention in the foreign exchange market.  At 10:30, with USD/JPY below 83.00, the Ministry of Finance instructed the Bank of Japan to intervene on their behalf. This is the first such intervention since 2004. Japanese officials did not provide a figure for how much yen the central bank had sold in the market. But Japan's top business daily Nikkei said the government may have sold more than two trillion yen ($23.4 billion), which would be largest single-day intervention on record in order to drive the Japanese currency down from 15-year highs. The Ministry of Finance also announced that the intervention will be unsterilized (i.e., they do not intend to conduct monetary policy actions to remove the increase yen from the domestic market). Analysts agreed that Japan could add this extra liquidity to its domestic market without destabilizing its economy since it is suffering from deflation and has a near-zero monetary policy.

Prior to the intervention, USD/JPY traded around 82.89. As a result of the intervention, the yen traded sharply down against the U.S. dollar touching 85.63 at noon GMT. See Chart 2. The beginning of the American session didn't trigger any changes, at 2:30PM in New York USD/JPY stood at 85.60.

CHART 2: USD/JPY SEPTEMBER 2010 (Note: Intervention time shown is Mountain Standard Time; thus, 19:30, when intervention took place, refers to 7:30pm in Colorado, which is 10:30 am in Tokyo)

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It appears that further intervention will depend on what Japan’s Finance Minister Noda decides after watching the markets. Kathy Lien, Director of Currency Research for GFT, concludes: “Threats of additional intervention will now be taken much more seriously which is why we believe that 82.87 will hold as the low in USD/JPY for the time being.”

If the market’s turn bullish on the Yen (i.e., pushing the yen back up), it is worth noting that according to “Japan has a war chest of 145 trillion Yen (i.e., its international reserves) at their disposal to fight the markets should the appreciation continue, however, it still remains to be seen as to whether this sort of intervention can be successful without the assistance of any of the other G7 countries.”

Brief History of Japanese Intervention in Foreign Exchange Markets

Between 1999 and 2004, Japan intervened regularly to ‘fend off’ JPY appreciation. The last reported intervention took place in March 2004. Since then the yen is about 20% stronger against dollar. What is historical record of central bank interventions being successful?  It is widely accepted that foreign exchange interventions are not successful in the long run. According to a study of Bank of Japan's previous interventions, the Bank of Japan was successful in bringing about a temporary reduction of the value of the yen when it was a coordinated effort of more than a $1 billion (USD), while single-handed interventions have been successful only 60% of the time. 

Between January 2003 and January 2004, Japan sold a total of about 35 trillion yen in a massive effort to slow the appreciation of its currency. But the intervention had little lasting effect in thwarting the yen's gradual climb.

One reason that intervention is likely to be even less potent nowadays is that the volume of the foreign exchange trading has grown rapidly in recent years. Since 2007, average daily turnover has risen 20 percent to $4 trillion, according to the Bank of International Settlements. That means intervention by a single government ends up being akin to a drop in the ocean.

Bloomberg Articles (The following are excerpts from )

September 15, 2010: Japan intervened in the foreign- exchange market to stem the yen’s gain to a 15- year high against the dollar and protect its exporters. The yen had risen more than 11% against the US dollar from mid-May until before the intervention. Japan’s currency has rallied amid concern about the durability of the U.S. recovery and the effect of Europe’s debt woes. The yen typically gains when investors avoid risk because of the country’s current-account surplus.

Japan unilaterally sold the yen against the dollar for the first time since 2004. Chief Cabinet Secretary Yoshito Sengoku said the finance ministry “seems to think” 82 yen per dollar to be the line of defense, after it reached 82.88 yesterday. Prime Minister Naoto Kan was under pressure from business leaders to stop the yen’s gains from undermining the exports propelling Japan’s growth. It may do little for the economy because Japan alone won’t be able to keep the yen from rising, said analyst Tohru Sasaki.

“In the medium-term it can’t change the overall direction” of the yen, said Sasaki, head of Japan rates and foreign-exchange research in Tokyo at JPMorgan Chase & Co. The benchmark Nikkei 225 Stock Average jumped 2.3 percent yesterday to 9,516.56.

The yen reached a level against the dollar “we couldn’t ignore,” Kan told reporters in Tokyo yesterday, adding that he will continue to watch the currency closely. Japanese authorities decided to intervene yesterday because the yen’s climb beforehand was due to traders’ views that Kan wouldn’t take such a step, said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. It was incorrect for observers to judge that chances for intervention receded with Kan’s reelection, a government official told reporters on condition of anonymity. The official also said yesterday’s yen sales were very large, without specifying a total and traders were probably thinking intervention would come at 80 per dollar, so the step came as a surprise.

The Japanese government official said European and U.S. officials were informed of the move in an effort to avoid a negative reaction. It took a while to convince Europe because authorities there didn’t like the idea, the person said.

U.S. Treasury spokeswoman Natalie Wyeth declined to comment on Japan’s announcement when reached by telephone. China’s central bank declined to comment, as did spokespeople for the Canadian finance ministry and central bank, U.K. Treasury and European Central Bank.

Coordination Need

“We want verbal or actual intervention if the yen appreciates more than the current level,” Hiromasa Yonekura, head of Japan’s Keidanren business lobby, said at a Sept. 13 press conference. “Rapid change should be managed,” Hiroaki Nakanishi, president of Hitachi Ltd., said this week in Tokyo.

Some analysts have said that official action by Japan might not weaken the yen for long unless it’s conducted together with overseas authorities. Kan said last week in a debate with Ozawa that getting international cooperation to halt the yen’s rise is “difficult.”

It’s “pretty unlikely” officials will be able to return the yen to the level “that companies are basing their profit forecasts” on, Nishioka at RBS Securities said. Firms said they remain profitable as long as the yen trades at 92.90 per dollar or weaker, according to the Cabinet Office’s annual report released in February.

For China, Japan’s decision is a “favorable development,” because it adds another country to the list of those intervening, said Tomo Kinoshita, co-head of Asia Economic Research at Nomura Holdings Inc. in Hong Kong. China has limited gains of its own currency to less than 2 percent since ending a two-year peg to the dollar in June.

Japan hadn’t intervened to sell yen in the foreign-exchange market since 2004, when the yen was around 109 per dollar. The Bank of Japan, acting on behest of the Ministry of Finance, sold 14.8 trillion yen in the first three months of 2004, after record sales of 20.4 trillion yen in 2003.

“We can’t overlook these movements that could have a negative effect on the stability of the economy,” Finance Minister Noda said today. “We conducted intervention to contain excessive movements in the currency market. We will continue to watch developments in the market carefully and we will take bold actions including further intervention if necessary.”

Bank of Japan Governor Masaaki Shirakawa said in a statement that the action should “contribute to a stable foreign exchange-rate formation.”

U.S. Treasury Secretary Timothy F. Geithner declined to comment about the prospects for currency intervention in an interview last week, instead saying that Japanese officials should do what they can to help their economy grow.

“They’re working through some difficult problems,” Geithner said on Bloomberg Television. “My view is they should be focusing like we are on how to make sure they’re reinforcing recovery in Japan and doing things that are going to help.”

Recent Japanese data have pointed to the expansion losing momentum. The government this week revised its July industrial output figures to show that production fell rather than increased from a month earlier. Japan’s economy expanded at a 1.5 percent annual rate in the second quarter, less than half the pace of the previous period, and consumer confidence slid to a four-month low in August.

Japan’s currency has gained as much as 10 percent against the dollar and 20 percent versus the euro this year, eroding profits at Toyota Motor Corp. and Nissan Motor Co., which are shifting some production out of Japan to stay competitive. A strong yen hurts Japanese exporters like Honda Motor Co. and Panasonic Corp. by making their products less competitive in overseas markets and eroding their foreign income when repatriated. However, even after the move, the yen remained stronger than the estimates manufacturers have used to calculate their earnings forecasts.

Sony rose 1.7 percent to close at 2,641 yen on the Tokyo Stock Exchange, after climbing 4.1 percent yesterday. The maker of Bravia televisions and PlayStation 3 game consoles is basing its operating profit forecast of 180 billion yen ($2.1 billion) for the current fiscal year on an exchange rate of 90 yen against the dollar.

Japan’s biggest manufacturers expect the yen to average 90.16 per dollar in the six months to March, according to the Bank of Japan’s quarterly Tankan survey.

“It’s impossible for Japan to win in global markets with the currency in the 80-yen range,” Koji Miyahara, chairman of the Japan Shipowners Association, said at a briefing yesterday in Tokyo. “Japan’s new administration should show it has zero tolerance for a stronger currency and should come up with additional steps,” said Miyahara, 64, who is also chairman of Nippon Yusen K.K., Japan’s biggest shipping line.

“The government sent an important message to the world,” Toshizo Tanaka, Canon’s chief financial officer, said in an e- mailed statement. “The impact on Japan’s economy would have been severe if the yen were left to appreciate so abruptly.”

Canon, which gets 78 percent of its sales abroad, gained 0.5 percent to 3,855 yen after advancing 1.9 percent a day earlier. The Tokyo-based maker of printers and cameras forecasts operating profit will shrink by 4.7 billion yen for every 1 yen the currency strengthens beyond 90 against the dollar in the second half of the year.

The yen’s advance threatened export earnings at companies led by Toyota Motor Corp. and Sony Corp. Toyota, the world’s largest carmaker, advanced 1.7 percent to 3,060 yen. The automaker yesterday rose 3.8 percent, leading gains by transportation-related companies, which rose the most among 33 industry groups in the Topix index. Shiori Hashimoto, a Tokyo-based spokeswoman for Toyota, declined to comment. The automaker aims to cut production capacity in Japan by about 20 percent as it shifts output overseas.

Honda, Japan’s second-largest car manufacturer, rose 0.5 percent after climbing 4 percent yesterday. “We welcome the move by the Japanese government,” said Yuki Watanabe, a spokeswoman at Honda’s Tokyo headquarters.

Japan’s previous currency intervention failed to stop the yen from strengthening to 102 against the dollar by the end of 2004, from an average of about 107 in the first three months of the year, during which the Bank of Japan sold 14.8 trillion yen. “The intervention in 2004 was a failure,” said Yuuki Sakurai, chief executive officer of Tokyo-based Fukoku Capital Management Inc. “Keeping in mind the size of the Japanese yen market, there’s a limit to what the government can do.”

Sept. 16 (Bloomberg) -- Naoto Kan took less than 24 hours to deliver the “decisive action” he pledged during a fight to remain Japan’s prime minister, selling the yen to stem criticism his response to a slowing economic recovery was inadequate. “We’ll continue to take decisive measures when necessary,” Kan said today at a meeting of the Japan Chamber of Commerce and Industry. “If rapid yen movements hurt the desire of Japanese companies to invest at home, employment conditions will get worse.”

The yen dropped the most in nine months against the dollar after Japan sold its currency for the first time since March 2004. It fell below 85 per dollar, having earlier risen to 82.88, the strongest since May 1995. It was trading at 85.46 at 9:26 a.m. in Tokyo trading today.

Bonds surged the most in almost two years yesterday and the benchmark Nikkei 225 Stock Average jumped 2.3 percent on speculation the funds sold by the government will be used to buy Japanese securities. The Nikkei 225 extended its advance today, rising as much as 1.1 percent.

The Second Week of Trading

Early into the week after intervention, the yen was trading in a narrow range and holding its post intervention levels. There was no evidence of additional intervention. See chart below.

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