What You Need to Know about BOJ Intervention

The main development has been Japanese intervention; the first such operation in six years. Although there has been much speculation of the likelihood of intervention, hinted at by stepped up verbal warnings by officials, but following the defeat of Ozawa in his leadership challenge, the immediate threat of intervention appeared to slacken and many market observers had pushed back the “expected” intervention until closer to JPY80 and maybe the start fo the new fiscal half year on Oct 1. In this sense the intervention caught the market wrong-footed.

The full details of the intervention are not known, but here is what the market suspects. In terms of size, the intervention is thought to have been around JPY100 bln (~$1.1 bln). It appears to have begun in the JPY83.25-60 range. This area may become more psychologically important, but some observers think that the JPY82 level is the “real” line in the sand. Also, there have been official suggestions that the intervention will not be sterilized. The 03-04 intervention was sterilized in the sense that the yen sold were raised not be simply printing money but by issuing finance bills. If the intervention is indeed not sterilized, then the yen sold will, at least on the margins, increase the supply of yen. Even though there are questions about the effectiveness of intervention in general, sterilized intervention is thought to have a lower probability of success than unsterilized intervention.

Another factor that would enhance the odds of successful intervention is if it was multilateral. It does not appear to be the case and therein may lie the rub. Intervention appears to be unilateral. That the US and Europe do not want to participate is not surprising, but under Japan could have sought to get other Asian-Pacific countries to participate, even if it meant providing them with the yen to sell. Reports suggest they may not have been contacted. The initial response by the European Commission seems surprisingly sympathetic.

A Reuters report cited EC officials noting that exchange rates should reflect economic fundamentals. It also noted that despite Japan’s current account deficit too rapid of currency appreciation could threaten economic recovery. Japanese officials had previously suggested that it was harder to get an understanding with the US than Europe. The US reaction is awaited. In the current context, silence may be damning, but the lack of sympathy seems to be taken for granted. The surprise would be the other way, if the US showed support for the intervention.

Outside of Japan, news from the UK would be the other main development. First UK jobless claims unexpected rose last month, the first time since January. This comes on the heels of the recent PMI reports that all were weaker than expected and news of a deteriorating trade balance. Today’s jobs report underscore the soft patch the UK economy has hit. The consensus had called for a 3k decline but instead the unemployment claims rose 2.3k. MPC member Weale had just noted yesterday that the fiscal austerity, which will be further detailed next month, may undermine the labor market. In his speech to the unions, BOE’s King today kept the door open to additional QE if needed and defends fiscal tightening. Yesterday’s higher than expected inflation report seems to be the main obstacle to additional BOE measures.

It was not the BOE’s QE that was a market focus yesterday, but media coverage of a US investment house’s view that the Federal Reserve will engage in a new large scale (~$1 trillion) of US Treasuries. That said, the same economist does not expected a double dip, i.e., renewed contraction of the US economy which he assessed as a 1 in 3 chance. Yet Bernanke and some others Fed officials have placed the bar for new substantial purchases as a significant deterioration of the economy. The GDP forecasts do not seem to line up with that kind of action. Moreover, recall last week’s Wall Street Journal survey found some 60% of the economists survey expect a new round of asset purchases but the same percentage of respondents did not think it would be effective.