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Forex Blog - Japan's FX Policy Debate Rages? Yen Summit Next Week a Yawner

Japan's FX Policy Debate Rages? Yen Summit Next Week a Yawner


Okay nothing really rages in Japan when it comes to debating…it is too impolite.  But inside Japan’s halls of monetary authority power – Cabinet, MOF (bureaucrats) and BOJ there is as close to Japan gets to a raging debate over how to prevent the yen from rising.  There is no real debate over whether a stronger yen is a problem or not.  Indeed the yen is the LCD in economic policy for this exporting nation…live with a strong yen as a surplus nation but don’t let a rising currency threaten economic expansion, especially in this the period of the lost decade or two. 


So when Finance Minister Kan meets with BOJ Governor Shirakawa next week the polite discussion will not be about whether to do anything to check the appreciation of the yen but what to do.  It is well established in Japan, as it is in the US, that the government makes currency policy not the central bank.  If the government wants to intervene it simply has MOF instruct the BOJ to do it and it gets done.  BOJ has some role in how it gets done (using its market expertise and contacts) but now if it gets done.  So next week’s yen summit is unlikely to waste much time on whether to intervene or not.  The problem facing officials is how to stop the rise in the yen without intervention.  There is no support outside Japan for currency intervention now.  G7 would oppose it if asked to help and would communicate displeasure if Japan intervened unilaterally.  And inside Asia Japan would find little sympathy for intervention – an increasingly important audience led by China.  Indeed Japan’s last intervention in the spring of 2004 was so massive and offensive to G7 that it has not intervened directly since. 


Next week’s meeting is all about a very unpopular (and probably short-lived) government pressuring the BOJ to provide additional credit easing to check the rise in the currency and at a time when the BOJ is not inclined to do so.  Indeed the BOJ in July chose to extend a special credit easing facility (purchasing corporate debt) for another 3 months to December (set to expire in September) rather than 6 months that the market expected.  Why?  BOJ officials noted improving credit conditions and a desire to wind down the program.  The credit easing program was put into place December 2009 (along with a cut in the call rate to 0.10%, and lending to banks for 3-mo intervals for a wider array of collateral)) in an emergency meeting at a time when the yen was also very strong. 


So the BOJ is looking to exit credit easing, not expand it, much less extend it.  And because the Japanese government lacks a political consensus and is vulnerable, I can’t see the BOJ caving on policy to provide a relief valve for the yen.  The only argument the Japanese government has is to point to what the Fed is up to and what a US slowdown means for Japan.  Keep in mind too that the BOJ has been upgrading its assessment for growth. 


The bottom line is there is little to no chance of a major BOJ policy shift emerging from the yen summit next week.  So the future yen policy will look just like the current one…verbal intervention coupled with “proxy” intervention – what I call pressure (directives) from MOF to state agencies like Kampo to sell yen for dollars at key chart points. 


But also never say never when it comes to Japanese policy and currency intervention…it may be the fallback option of the government ahead if the current strategy and tactics are not working.  But this will involve a direct affront to G7 partners, Asian neighbors and most JPY market makers outside the Japanese banks and other privileged, if few, firms that see the business.


David Gilmore




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