TOKYO, Oct 22 (Reuters) - 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 might.
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 yen.
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
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 positions.
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 diminishing.
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.
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. FXJPY
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 dollar. (Reporting by Masayuki Kitano, Hideyuki Sano, Leika Kihara and Charlotte Cooper; Editing by Edmund Klamann)