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Because I Kan

2010-09-20 11:10:02

Yen intervention

Exchange-rate manipulation with a political twist

Sep 16th 2010 | tokyo

HOW much does loyalty cost in Japan s fractured politics? Perhaps as much as 2

trillion ($23 billion). News reports suggest that may have been the sum it took

to push the yen from 82.88 per dollar to beyond 85 when, on September 15th,

the authorities unilaterally intervened in foreign-exchange markets for the

first time since 2004.

In explaining the surprise move, the finance ministry argued that the surge in

the yen to its highest level against the dollar since 1995 was too much

volatility for the authorities liking. There was official talk of a defence

line around 82. Another selling blitz was not ruled out.

But there was also a political element. One day before, Naoto Kan, the prime

minister, had fought off a challenge to his leadership of the ruling Democratic

Party and hence of Japan itself by Ichiro Ozawa, a feisty operator who had

pledged to weaken the yen if elected. As the currency soared uncomfortably high

following Mr Kan s victory, intervention was a way of showing to Mr Ozawa s

supporters that Mr Kan could be just as decisive.

According to HSBC, Japan has plenty more room to hit the market hard, fast and

furious , because the country suffers from deflation and has near-zero interest

rates. That means it can benefit from extra liquidity without destabilising the

economy. Analysts say the Bank of Japan appears not to have sterilised , or

mopped up, the excess funds, as central banks do if worried that intervention

will stoke inflation.

However, the action of the Japanese authorities was unsupported by other

central banks, which may weaken its effectiveness. Moreover, in reality Japan s

currency is much cheaper than it looks in nominal terms, because prices in

Japan have been falling for years, whereas in dollar economies they have risen.

Other central banks have sound economic reasons for not stepping in on Japan s

behalf.

In Japan, the argument for stopping yen appreciation is partly a psychological

one, economists say. Though exporters have complained noisily about the

currency, they continue to reap solid profits abroad and the repatriated

earnings may help lift the yen. A stronger currency does most damage to

confidence about the future: it tends to depress the stockmarket, which dampens

exporters risk appetites. Japan s main stockmarket surged by 2.5% immediately

after the official yen sales.

Intervention is a deal with the devil, however. Currency manipulation from a G7

country such as Japan could undermine efforts to persuade China to refrain from

artificially cheapening its own currency. Given that Japan s trade with China

is bigger than its trade with America, its beggar-thy-neighbour policy might

perversely end up beggaring itself.