Analysis: Barriers against intervention rise with yen

By Steven C. Johnson

NEW YORK (BestGrowthStock) – In decades past, Japanese authorities would have wasted little time printing more yen to counter the sort of gains their currency has been racking up.

Yet even with the yen at a 15-year peak of 85 per dollar and near its record high around 80, official intervention to weaken it seems less likely than ever before.

U.S. and euro zone central banks, whose financial firepower would be needed in any push to bring down the yen, appear content to let their weak currencies revive their own exports and flagging economies.

“Most people agree that for currency intervention to be successful, it has to be coordinated, and that quite simply is not going to happen,” said Tom Levinson, a foreign exchange strategist at ING Commercial Banking in London. “The U.S. and others just aren’t going to sign up for it.”

The main reason is economic. Growth in Europe and America, while stronger than Japan’s, is still sluggish, and strong currencies would undermine exports and push up interest rates.

A euro zone official told Reuters last week that European authorities would not welcome Japanese intervention on the yen and cast doubt on any coordinated push.

“If you look at the majority of the developed world, deflation is a concern, so nobody wants their currency to strengthen,” said Takuji Okubo, chief economist for Japan at Societe Generale.

In addition, allowing Tokyo to intervene for the first time since 2004 could hinder efforts by the Group of 20 economies, including Japan, to convince China to let its yuan appreciate.

What’s more, recent Chinese interest in Japanese government debt would dilute the impact of intervention, as would Japan’s own pension funds, which are repatriating foreign investments as U.S. yields fall to record lows.

Japan’s fragile government would essentially be locking horns with a $3 trillion-a-day foreign exchange market (Read more about international currency trading. ) determined to buy the yen.


Historically, U.S. and euro zone officials have been more hostile to currency manipulation than their counterparts in Japan, although they did help Japanese authorities weaken the yen in the mid 1990s, when anxiety stemming from the Mexican peso crisis drove it to an all-time high of 79.75 per dollar.

Japan’s exports compete with those of China and South Korea, which intervene to dampen currency strength. Slower exports would hurt Japan’s weak growth and stoke deflation fears.

Yen strength also hurts corporate profits, pushing down share prices and consumer spending. Data this week showed the Japanese economy barely grew at all in the second quarter.

So far, government officials have tried to talk the yen lower. Japan’s prime minister and central bank governor are due to meet on Monday to discuss the situation.

Sympathy from abroad will be in short supply. “The U.S. and Europe have so many other things to worry about right now. The message to Japan on yen strength will be: ‘deal with it,'” said Brown Brothers Harriman strategist Win Thin. “The Europeans have had to deal with a strong euro since 2005.”

Some analysts say the yen’s rise may be a lot less painful for Japanese firms than the government fears.

While the nominal dollar-yen exchange rate has depreciated some 25 percent since 2008, the real effective exchange rate remains well below the peak seen in the mid-90s.

That’s because in Japan, falling prices have squeezed wage costs and helped exporters maintain market share.

Increased overseas production for Panasonic, Toyota and others also shields firms from currency risk.

“The U.S., the Europeans, even the IMF would argue the yen is not inconsistent at current levels, given Japan’s current account surplus, and that Japan should welcome it and become less reliant on exports to drive growth,” said Chris Scicluna, deputy head of economic research at Daiwa Capital Markets.


Japan may act alone if the yen plunges to 80 per dollar or the Nikkei stock average breaks below 9,000, Scicluna said. The Nikkei on Wednesday closed at 9,240.54.

In that case, intervention would likely be paired with more monetary easing, possibly via extending funding operations announced at an emergency December meeting.

And still, intervention may not work, said UBS strategist Geoffrey Yu. Switzerland has spent the past 18 months selling francs against the euro, and while deflation risks have receded, Yu said that has more to do with productivity gains that have helped Swiss companies retain export competitiveness.

“The SNB is now sitting on foreign exchange losses and a far stronger franc in real terms,” Yu said.

(Additional reporting by Stanley White in Tokyo and Krista Hughes in Frankfurt; Editing by Leslie Adler)

Analysis: Barriers against intervention rise with yen