Markets starting to take threat of yen intervention seriously

A BARRAGE of warnings from senior officials led by Finance Minister Taro Aso that Japanese authorities will not stand by and watch the yen continue to surge in value gained traction on Friday, causing the currency to give back some of its recent gains and reversing part of this week's heavy drop in Tokyo stock prices.

After Mr Aso declared on Friday morning that the government would take action as needed against what he called the "one-sided" recent moves in the yen, the Japanese currency retreated somewhat from its 17-month high to close in Tokyo trading at 108.78 to the dollar, while also weakening against other currencies

The Nikkei 225 stock average meanwhile gained 0.5 per cent to 15,821.52, crawling back from its midday low of 15,471.80, although it was still down slightly more than 2 per cent on the week.

In addition to being hit by general dollar weakness, the yen had been pushed up sharply after Japanese Prime Minister Shinzo Abe said earlier this week in an interview with The Wall Street Journal that Japan should avoid intervention in foreign exchange markets.

His statement appeared to give the market carte blanche to go ahead with pushing the yen ever higher against the dollar and other currencies without fear that players might "get burned" by official intervention, analysts said.

Even so, some analysts still see the authorities' hands as being tied by Mr Abe's pledge to avoid intervention, and by the fact that Japan is due to host the Group of Seven (G-7) summit in May, when its action will come under close scrutiny from its advanced nation peers.

"This is really just a bit of Friday respite," Reuters quoted an unnamed dealer with one international bank in London as saying. "Where we go next week seems set to depend on risk appetite again. As long as stocks are falling, the dollar will be a sell on any rallies."

A series of finance ministry and other Japanese government officials took turns on Friday to state that Japan could not stand idly by and watch the yen continue its upward trajectory, which saw it jump by as much as 2 per cent in value against the dollar on Thursday.

The language they used was similar to that which government officials have employed to signal official interventions in the past and markets seemed unwilling to risk being caught out by interventions around the weekend.

"Of course there is some fear in the market," Manuel Oliveri, a strategist at Credit Agricole in London was quoted as saying

"But one has to bear in mind that there is the G-20 agreement not to (intervene), and that any intervention would need to be large and really that means it would need the support of the Fed and the European Central Bank," he added.

The yen's surge - which is seen partly as a reflection of dollar weakness on the back of the US Federal Reserve's renewed caution over raising interest rates - has come at a very bad time for Japan and for Mr Abe.

Japan's economy almost certainly slipped back into recession in the first quarter of this year with gross domestic product declining, or static at best, following a contraction in the final quarter of 2015. This would put it in technical recession although official data is not due until later this month.

With an Upper House election due in July, the Bank of Japan (BOJ) could come under pressure to make some move this month that will ease upward pressure on the yen, analysts say. This could take the form of further monetary easing, with one eye to the yen exchange rate.

The BOJ is unlikely, however, to push yen interest rates down further into negative territory because its initial move into this controversial area, implemented in February, is meeting with a growing backlash from Japanese financial institutions and from business corporations.

btworld@sph.com.sg

This article was first published on April 9, 2016.
Get The Business Times for more stories.