Yen Intervention

  • For the second time this week, Finance Minister Taro Aso threatened to intervene in currency markets, after the yen has strengthened more than 10% against the dollar this year.
  • Uncoordinated intervention, in which Japan goes it alone without the help of the Federal Reserve and other big central banks supporting the trades, tends to provide a fleeting effect. The U.S. seems in no mood to help this time around.
  • The one weapon that has been proven to weaken the yen is BOJ easing in the form of asset purchases.
  • It was the lack of a BOJ move at its last meeting in April, in fact, that caused the most recent leg up for the yen.
  • With massive monetary easing having already flattened borrowing costs below zero even for long term debt, a weak currency may be one of the few things left to support growth.
  • Aso, and his boss, Prime Minister Shinzo Abe, do have another tool at their disposal: fiscal policy. Most specifically, abandoning a planned 2017 increase in Japan’s value-added tax would probably do the most to lift sentiment, weakening the yen again.
  • The best case scenario for those betting on a weak yen, and its twin sister, a rising stock market, is that Mr. Aso’s threats are really just a delaying tactic. The tax decision could come by the end of the month. And the BOJ meets again in June and July, when a further slug of easing may yet be in store. In 2014, a rapid fire BOJ easing move followed by a delay in the same tax sent the yen weaker for the better part of the following 14 months.
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