TOKYO Oct 22 The dollar has fallen within
spitting distance of its post-war record low against the yen and
market players say Japanese authorities might intervene again if
it falls sharply, after they intervened in September.
But there is a growing impression among some traders that,
with a debate globally about competitive currency devaluation and
Japan's recent criticism of South Korea for intervention, Tokyo
may not intervene again, even though its policy makers say they
The dollar has lost 3.5 percent on the yen since the end of
August and 13 percent so far this year, despite 2.1 trillion yen
or $25 billion worth of intervention last month, with the U.S.
currency sold across the board after the Federal Reserve
signalled it was ready to ease policy again.
The dollar dipped to its lowest in 15 years this week, to
80.84 yen JPY=. It has recovered above 81.00 yen but the market
is jittery about the possibility that Japan will intervene as the
U.S. currency grinds down towards its 1995 post-war low of 79.75
Q+A on Japan's intervention capacity [ID:nTOE68S07S]
Q+A on unsterilised intervention [ID:nTOE68G02P]
Graphic on trade weighted fx: r.reuters.com/qun86p
Currency tensions map: r.reuters.com/jec96p
PDF report on currencies: r.reuters.com/gez77p
WHAT MIGHT PROMPT JAPAN TO INTERVENE AGAIN?
The Bank of Japan acts on behalf of the Ministry of Finance
in FX intervention, and those who think it might step back in say
it could do so if there were a rapid rise in the yen
specifically, rather than a general drop in the dollar, possibly
through 80 yen per dollar, and accompanied by a sharp drop in the
Nikkei .N225 share average.
If yen crosses such as the euro/yen and Australian dollar/yen
rates remain reasonably stable, intervention is seen as less
likely. But general yen strength could change the equation,
especially if it is being driven by a build up of speculative
Some traders say a sharp fall in Japanese share prices could
alarm the authorities and prompt intervention. If the Nikkei
falls below a 16-month low near 8,800 hit in early September, the
Japanese government may feel more pressed to act.
WON'T THE CURRENCY WARS DEBATE STOP THEM?
The debate makes intervention more difficult, when China is
under pressure to allow more rapid appreciation of the yuan, and
this is one reason why some in the market think the likelihood is
Japan escaped overt criticism from its G7 counterparts for
its Sept. 15 intervention, the only confirmed bout so far. But
behind the scenes it got heavy criticism from the Europeans,
which has now made it very difficult for Tokyo to justify
intervening again, a G7 source told Reuters.
Indeed the tone of Japanese policy makers' comments changed
after the October IMF and G7 meetings in Washington. Finance
Minister Yoshihiko Noda was at pains to stress that intervention
was aimed at stopping excessive moves from hurting the economy,
rather than the start of a big, long campaign aimed at targeting
a specific foreign exchange level.
Noda then criticised South Korea for intervening to keep down
its currency, saying Seoul's leadership of the G20 would come
under question due to its regular intervention, a barb some
analysts took to mean: "If we can't do it, then neither can you."
By criticising South Korea, Noda also did not sound to some
like a finance minister considering immediate intervention.
SO WHAT'S THE AUTHORITIES' STRATEGY?
The strategy is hard to fathom at this stage because of the
politics involved and because the only confirmed intervention in
the past six years is the Sept. 15 action, so the market does not
have a lot to go on.
Levels the market thought might be lines in the sand have
been and gone, with the next potential one at 80 yen.
While at first some thought Sept. 15 marked the start of a
longer campaign, now it may be that the authorities keep the
action down to a few opportunistic occasions to counter rapid yen
moves and remind the market of the two-way risk.
In the meantime, policy makers keep up a steady stream of
verbal reminders that they will act decisively when needed.
HOW FAR IS THE YEN LIKELY TO RISE?
If no intervention occurs and the yen strengthens through 80
per dollar and then 79.75, some see it moving up to 78-76 per
dollar to start with. Daisuke Uno, chief strategist at Sumitomo
Mitsui Banking Corp, told Reuters in September that his personal
forecast was for the yen to reach 50 next year.
A Reuters poll in early October showed a median forecast of
88 yen per dollar in six months' time and 92 yen in a year.
A dollar drop below 80 yen would likely turn that level into
resistance which the greenback could struggle to break at first.
In the options market, implied volatilities are subdued,
suggesting that option market players expect the yen's rise will
be slow, with one-month volatility at 11.5 percent
But a trader at a Japanese bank also noted there has been
buying in longer-dated dollar puts/yen calls, such as six months
and nine months, with strike prices far below the record low of
79.75 yen, suggesting expectations of a deeper fall in the
(Reporting by Masayuki Kitano, Hideyuki Sano, Leika Kihara and
Charlotte Cooper; Editing by Edmund Klamann)