More on Potential Intervention

Many had expected the BOJ to have intervened already and its absence raises the question of why haven't they. The simplest explanation is they don't think it would be effective. This is the meaning of the official comments that say that the real issue is dollar weakness not yen strength. But some do not find the straight forward explanation very satisfying.

A news wire now cited three "unnamed sources" suggesting that US opposition to intervention is preventing unilateral BOJ intervention. Really ? This seems to exaggerated the US influence over Japan. The US did not seem to look at the massive BOJ intervention in late 2003 and early 2004 favorably, yet it took place. That is to say if the political will was stronger, US distaste/objections to intervention would be overcome. The yen's rise is not simply against the dollar, as the performance of euro-yen clearly illustrates. The yen has appreciated by about 10.5% against the dollar this year and about 21% against euro. Since the end of Q1, the yen has appreciated by around 14% on a trade-weighted basis and 40% in the past two years.

Ozawa, who is challenging Kan in the DPJ leadership contest toward the middle of the month has been arguing in favor of intervention. But when he was cabinet secretary (until recently) he reportedly was not pressing this. In any event, polls show Kan clearly ahead.

Japanese officials may be hoping to get some verbal support from the G7/G20 around the meetings in a few weeks. It would not be unprecedented as the G7 did so during the heart of the financial crisis. The odds of this seem greater than the odds of coordinated intervention.

In terms of market conditions, the dollar-yen implied volatility has moved higher this week and is poised to close above its 100 day moving average today for the first time since mid-July. Euro-yen vol is well below its 100-day moving average. In terms of the unilateral direction of the market, as reflected in the relative pricing of puts and calls equidistant from the money, the market is near its recent extremes, which is still below the extremes seen in the March-April period. The net long yen position at the IMM is at the upper end of where it has been over the past several years.