BoJ vs the World: Yen Intervention Chronicles

I admittedly feel sorry for the Japanese with their currency hitting record high after record high while their economy suffers from massive public debt, lingering deflation, and this year's devastating earthquake. While there are reasons that partially explain why the yen is especially strong at the moment, you have to wonder if Japan's macroeconomic fundamentals warrant such strength. Although Japanese firms have done their best over recent years to move more manufacturing operations offshore to Asian neighbours in particular precisely to escape yen strength, they can only go so far. Japanese companies are certainly feeling a profit pinch nowadays [1, 2] due to currency factors.

After the dollar hit at all-time low of ¥75.31 at the start of this week early Monday in Tokyo trading, the BoJ came into the market in a major way for the second time in three months:

Japan sold the yen for the second time in less than three months after it hit another record high against the dollar Monday, saying it intervened to counter excessive speculation that was hurting the world's No. 3 economy. The intervention vaulted the dollar more than 4 percent higher, which would mark its biggest one-day gain in three years.

Though official figures are hard to come by due to the recency of the action and Japan's obvious reluctance to disclose them, the magnitude of the dollar buying was no small beer and likely set new standards in terms of the amount of greenbacks bought by the BoJ. How does $70 billion in a day sound, for starters?

Finance Minister Jun Azumi said Tokyo stepped into the market on its own at 1025 am. local time (0125 GMT) and would keep intervening until it was satisfied with the results. Traders estimated the Bank of Japan could have bought between $65 and $75 billion against the yen, which would be more than its Aug. 4 intervention, when it was a record $59.4 billion. The scale of the intervention demonstrated the authorities' resolve, but more was expected given substantial long yen positions in the market.

Many market participants however are unsure if Tokyo will or can sustain this level of dollar buying. After all, the intervention in August was not followed up in a major way and we've ended up where we are right now with the dollar doing another of its periodic death swoons:

European traders were inclined to test Tokyo's resolve, pushing it below 78 even though there had been talk of possible official bids around there. This brought it well below an earlier high of 79.55 yen on EBS trading platform. "The focus is to make it as painful as possible to hold long yen/short dollar positions," said Sebastien Galy, currency strategist at Societe Generale.

"If dollar/yen continues to go aggressively lower then the Japanese authorities will feel the need to intervene again". The dollar was still shy of its 200-day moving average around 79.88 yen, though some traders speculated Japanese authorities may look to push it above 80 yen. It was last up 2.75 percent at 77.83 yen.

Although it's a cliche by now, blaming America is not at all unwarranted here with various Fed officials signalling enhanced free money policies via a third round of quantitative easing. (When in doubt about financially-related shenanigans, investigate the US of A.) How much more rather useless dollars is Japan willing to accumulate? Buying $70B daily of a currency with a clear depreciating bias is... sheer madness. Call it the exorbitant privilege of America during the contemporary era of global currency war as it inflicts untold amounts of "collateral damage" on Japan.

In geopolitical terms, dollar carpet bombing hurts America's strategic allies (e.g., Japan) as much if not more than its competitors (e.g., China). With friends like FRB Chairman Bernanke, who needs enemies, indeed. It's something to ponder as Japan seeks leniency from being labelled a "currency manipulator" by increasingly desperate US political classes. Indeed, top on the Japanese agenda is asking other G20 countries to be more understanding of its currency interventions. Although the European debt crisis looks set to top the G20 to-do list, Japan may still be made to explain what's going on...

Tokyo's latest foray followed warnings that its patience with yen strength was wearing thin, and came just days before the Group of 20 leaders' summit in France, where the euro zone debt crisis was expected to dominate the agenda. Japan will be keen to win G20 understanding that a strong yen is one challenge too many for an economy still grappling with the effects of March's massive earthquake and tsunami.

I for one certainly cannot fault the Japanese for their actions in good conscience.