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Wednesday September 15, 2010 - 14:10:29 GMT
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Japan's Unwelcomed Intervention Action (FXA)

Currency intervention by Japan is always the lowest common denominator for policymakers especially elected ones (BOJ is an agent of MOF and has little say over currency intervention, though lots of say over whether to sterilize it).  The only reason why we have not seen intervention prior to today is also political.  Japan’s biggest economic and political allies, Europe and the US, do not think it is a good idea.  It smacks of mercantilism and is a defense of the status quo…large unsustainable structural imbalances.


However, not all large global economic players are unhappy with Japan’s intervention today.  China is quietly high fiving over this decision.  China is ready to get crucified by US Congress over its meaningless yuan appreciation since the June decision to introduce greater “flexibility” into the CNY FX regime.  Until the middle of last week when Obama economic adviser Summers was in Beijing, the yuan was up a whopping 0.4% versus the USD.  Since then it is up 1.2%...nothing like currency politics. 


China’s leaders are also doing an end zone dance in Beijing because now they have a new source of demand for a boatload of US Treasuries they want to sell…China can now more aggressively cut its exposure to USD and UST’s by selling both for JPY and JGB’s without putting their net USD UST position at as much risk if it simply sold them to a market without Japan as a natural buyer.  Overall it could be a wash for the US Treasury market unless Japan decides to hold large USD deposits with Japanese banks earning near nothing…very unlikely.


So far only EU’s Juncker has gone public on “denouncing” Japan’s decision to intervene.  But look for some coded US denunciation from Geithner in Congressional testimony Thursday on this question when he will say it is best to leave FX rates to markets. 


One of the more potent components of Japan’s intervention was the alleged decision by the BOJ to leave the intervention unsterilized.  If true this would result in a permanent increase in the money supply – high powered money – and would qualify as quantitative easing (it was used late in the 2003-2004 currency intervention orgy by Japan).  I did see remarks from BOJ’s Noda from earlier today after the intervention was deployed and my sense was that he was against unsterilized intervention.  So I do not think this is a shut and closed case despite wire reports.  If it is unsterilized, I think BOJ independence should get downgraded…sell JGB’s.  Surely the BOJ knows that Japan’s economic future is in a different society…one less homogenous (immigration policy that is far more comprehensive than sex workers and bankers), one that encourages more consumption (less savings – tax it) and one where markets determine allocation of capital and resources not bureaucrats. 


If Geithner has any guts he will follow the lead of EU’s Juncker and denounce Japan’s intervention policy.  Anything short of this, even coded in Fed not lending a helping hand or expressing support for market-determined exchange rates is insufficient…it is time for Timmy to say it like it is. 


For the currency intervention neophytes few axioms….it is unsustainable window dressing, though selling your own currency as Japan is doing is far more sustainable…it is most potent early and less potent over time (diminishing marginal returns…the market is far bigger than the reserve managers and can turn the tide quite easily…unilateral intervention is less effective than multi-lateral intervention…sterilized intervention is less potent than unsterilized intervention (form of QE)…reserve managers usually buy shorter dated government debt in the currency they are buying…currency intervention to defend global structural imbalances at a time when the global economy is extremely vulnerable is reprehensible.


David Gilmore




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