Investors are kept guessing on currency intervention

by Shinya Ajima

Kyodo

Silence seems golden for the government, which wants to leave investors guessing whether Tokyo will intervene in the foreign exchange market to stem the rise of the yen against other major currencies.

Finance Minister Jun Azumi repeatedly said “No comment” last week in dodging questions from reporters about the government’s position on the Japanese currency’s resurgence against the dollar and the euro amid uncertainty over the sovereign debt crisis in Europe.

Azumi had previously been rather candid in warning against speculators chasing short-term profits with large one-sided bets at times of market instability, saying Japanese monetary authorities will respond “decisively” if necessary — a code word suggesting readiness to intervene and counter any disorderly movement in the yen’s rates due to such investors.

The sudden halt in his verbal warnings added to speculation that the Finance Ministry and the Bank of Japan have already stepped into the market in a stealthy manner, as was seen in November. But many market participants also believe Azumi has remained tight-lipped for strategic reasons, and that this seems to be having some effect so far.

“Now it is proving much more effective for Azumi to basically keep silent and only issue warnings against speculators sometimes, rather than repeatedly saying he would take ‘decisive’ measures,” said an analyst at a foreign bank operating in Tokyo.

Azumi briefly broke his silence on June 5 after an emergency conference call held by the finance ministers and central bank governors of the Group of Seven advanced economies to discuss the crisis in Europe, where the fiscal problems in Greece had led to concerns over the Spanish banking sector.

“I believe (the G-7) shared the understanding that excessive volatility and disorderly movement in foreign exchange rates generate adverse effects on the economy,” he told reporters after the talks over the phone, although the currency issue was not on the agenda.

The comment came in line with the G-7 statement released in September, in which Tokyo had apparently found a reason for its yen-selling, dollar-buying interventions in the period between late October and early November.

Although the G-7 did not release any joint statement last week, a senior BOJ official acknowledged that if the group does not release any new statement, the G-7 will maintain the position mentioned in its most recent statement.

It is not known, however, whether the other G-7 countries — Britain, Canada, France, Germany, Italy and the United States — have accepted Japan’s argument and would support its additional interventions.

European officials earlier said Japanese interventions could complicate their efforts to encourage China to allow the yuan to move more freely by leaving the managed floating system.

The United States released a report in December on currency trading that criticized Tokyo’s unilateral actions and called for more economic reforms in Japan to counter the negative impact on industries from a strong yen.

With this background, analysts and dealers say the hurdles remain high for Japan.

“The September G-7 statement also stressed their basic principle that exchange rates must be ‘market-determined’ and this signals it is not easy for the Japanese government to conduct yen-selling interventions,” said Osamu Takashima, chief FX strategist at Citibank Japan Ltd.

A dominant view in the market is that Japan will not intervene until the yen strengthens to fresh record levels at around ¥75 to the dollar and around ¥90 to the euro, Takashima said.

Economists at Goldman Sachs Japan Co. said in their report that it is possible Tokyo will intervene even before the yen nears a new record.

“The government and the BOJ strongly hope they can nip an excessively strong yen in the bud before it cripples the economy,” the report said. But it added that any additional intervention would require a “rather careful judgment” by the Japanese authorities, given criticism from the United States and Europe.

On Monday, the dollar traded in the upper ¥79 range in Tokyo while the euro fluctuated at around the ¥100 line as eased tensions over Europe following the weekend agreement by the eurozone finance ministers to provide aid to struggling banks in Spain somewhat reduced demand for the yen as a safe-haven asset.

Speculation over Japan’s interventions was rekindled earlier this month when the yen weakened at a relatively fast pace after advancing to 77.66 to the dollar and 95.59 against the euro, after weak U.S. jobs data released June 1.

The yen then firmed at around 78 and 97 ahead of the G-7 talks, stimulating the view that the BOJ, which acts as an agent of the ministry, had secretly made an order with some banks to sell the yen if it appreciates to preliminarily designated levels.

Dealers said the rumor accelerated because the BOJ had apparently conducted “rate check” action, in which central bank officials directly call and ask currency traders at financial institutions about the exchange rates they are trading at. The move normally fuels speculation that the government is looking for the right time to intervene.

“There is no doubt the market has been alerted by possible interventions,” the senior BOJ official acknowledged, while declining comment on whether the BOJ had conducted a rate check and made any secret orders to sell the yen.

Azumi’s strategic silence has added to all of those uncertainties. Whether the government has additionally stepped into the market will remain unclear until June 29, when the ministry is to release data on any market operations conducted between May 30 and June 27.