Japanese Policy Response to Yen Strength

The dollar is firm against most of the major and emerging market currencies. The yen and Swiss franc are exceptions.

The dollar has fallen to new record lows against the franc. The franc is up about 1.5% against the euro, but is still about 3% above the record low carved out at the end of last year and earlier this year. The Swiss National Bank meets on Thursday and is unlikely to do anything. Even its complaints about the Swiss franc's strength has waned in recent weeks, though government officials seem somewhat more concerned.

The dollar is slipped back below JPY81.00 and toward yesterday's spike low near JPY80.60. What can officials do? Most likely the BOJ will be considerably more aggressive tomorrow in providing liquidity to the market. Today's injection of JPY8 trillion was not sufficient to keep some short-dated term rates from rising. On Monday the BOJ inject JPY15 trillion.

Less likely, but still an option, is intervention in the foreign exchange market. Such an intervention could be justified on grounds of the disorderly market conditions and is likely to receive a more sympathetic hearing that the recent intervention attempt. The odds of lasting success may not be great, but if coordinated or conducted outside the Japanese time zone, it could increase chances of stabilizing the market. Note the intervention would seem to go against some ideas, which we have down played of Japan selling Treasuries to repatriate funds for reconstruction.

Lastly, the BOJ could step in and buy equities as opposed to ETF and REITS as it is doing now. Yesterday it did announce the doubling of its QE purchase to JPY10 trillion, but stopped shy of buying equities outright.