Japan sold off the yen yesterday to try and drop its value from 15 year highs.
The manipulation, which cost hundreds of billions of yen, came only a day after a leadership challenge.
It followed the yen’s rise to new 15 year highs against the greenback after Prime Minister Naoto Kan was re-elected as the head of Japan’s ruling party.
He beat Ichiro Ozawa, who had specifically called for intervention to help shelter the nation’s exporters from the currency’s strength.
The intervention won’t have the impact the government is hoping for because the currency markets are simply too large and deep.
At best the intervention is symbolic, at worst it is a waste of money, which Japan with its high domestic debt doesn’t have, despite having record foreign reserves.
Seeing the leadership battle was supposed to be a fight over Japan’s big domestic debt, with Mr Kan wanting to start bringing it under control and Mr Ozawa wanting to increase spending and debt, it seems odd that the first move is to spend money on a useless intervention that will probably cost the central bank and the government much needed funds that could be spent on a bit of stimulus.
The intervention was the first since 2004 (that has had no impact, given the yen’s rise since then). Then the intervention lasted 47 days and around 14.8 trillion yen ($US171 billion) was spent, fruitlessly.
The economy is sluggish and deflation won’t go away.
According to Reuters he said:
"We have conducted an intervention in order to suppress excessive fluctuations in the currency market," said Finance Minister Yoshihiko Noda, suggesting Japan might intervene again.
"We will closely monitor currency developments, and take firm action including intervention," Noda said.
Late media reports put the selling at around 10 -12 trillion yen. The Bank of Japan won’t sterilize the sold yen by draining funds from money markets to compensate for the increased amount of money in the economy.
Instead it will be left to boost liquidity and hopefully the economy. It’s a form of what’s called quantitative easing.
Mr Noda said that Japan had contacted other nations about the step, without specifically saying that yesterday’s move was taken unilaterally. But it was.
The yen fell 3% to 85.50 at one stage against the US dollar. Japan’s currency reached a new high of 82.88 earlier yesterday.
The Tokyo stockmarket rose with the Nikkei jumping 2.3% on the day, reversing earlier losses.
The share prices of major exporting companies rose.
Until now, the government has pressed the Bank of Japan to step up liquidity injections to help address the gains in the yen.
The central bank last month increased a credit program by 10 trillion yen, but the step has had little impact on the currency.
Those cheering in Japan had better look to Switzerland where 15 months of repeated interventions failed to step the rise in the value of the franc as the euro weakened.
The intervention produced big losses for the Swiss National Bank, the country’s central bank, which embarrassed the government.
The losses forced the central bank to give up and retreat to the sidelines.
According to this report the intervention cost the bank 14.3 billion Swiss francs, or around 7.5 billion euros or more than $A10 billion in trading losses.
"The SNB is a publicly listed entity on the Zurich stock exchange," the report said.
"Public shareholders – cantons and cantonal banks – hold around 55 percent of the 25 million francs worth of the stock with most of the remainder owned by private individuals."
Overall the bank lost 2.8 billion francs (around $A3 billion), less than the original estimate of 4 billion because of profits made on its investment in UBS, the big commercial bank the central bank rescued three years ago.
The bank’s intervention was heaviest in April and May when doubts about the euro and countries like Greece and Spain saw the euro plunge and the value of the US dollar, Swiss franc and yen all soar.
The head of the central bank has defended the intervention, saying that if it had not been done, deflation would have gripped the country’s economy and unemployment would have soared to a nasty 8%.
Japan has not been able to escape deflation in the past two decades (except for the odd patch or two, inflation re-appears then disappears as deflation takes over, with the yen’s rise partly to blame).
Unemployment is running at a discomforting 5.2%, with many of the jobless part time or temporary workers under the age of 40, which means a whole generation of consumers is being gutted by the malaise.
And the intervention in Japan came as China again boosted the value of the Yuan to a new high yesterday.
The People’s Bank of China fixed the Yuan’s reference rate at a record high before the US House Ways and Means Committee starts a two day meeting, tonight our time, to discuss China’s currency policy.
The Yuan rose 0.13% to 6.7378 to the dollar.
The Yuan has strengthened 0.8% in the past five days after barely rising since the new valuation method started in June.
Now, that’s real intervention and real manipulation.
