September 17, 2010 / 9:04 AM / 9 years ago

Q+A: How is Japan judging success in yen intervention?

TOKYO (Reuters) - Japan’s first yen-selling intervention in six years has lifted the dollar well above a 15-year low hit this week, raising questions about what authorities would consider success in the unilateral action.

Just minutes after the dollar hit a low of 82.87 yen on Wednesday, Japanese authorities stepped into the market and made their biggest one-day intervention on record, selling an estimated 2 trillion yen ($23 billion).

WHAT RESULT WOULD JAPAN CONSIDER A SUCCESS?

The chief aims at this stage appear twofold: dissuading speculators from aggressively selling the dollar against the yen by creating more two-way risk, and absorbing dollar selling by Japanese exporters repatriating earnings.

The Ministry of Finance does not appear to be trying to drive dollar/yen to specific levels, having stepped back from the market since Wednesday’s spree of yen selling. Traders report that hedge funds have been getting out of long yen positions but may still have more to do.

They also do not rule out chances of the Bank of Japan, which acts for the MOF, trying to push the dollar above 86.00 yen to trigger stop-loss buy orders and shunt it a bit higher.

Japanese exporters are said to have held off some of their dollar sales in the hope of getting a better rate before closing their books on the fiscal half-year ending on September 30. Japan’s action is widely seen as creating an opportunity for them to sell before that date.

Because of this, some think intervention may be scaled back or even put on hold after the end of September. Others are not so sure, believing that the MOF would not want to risk a sudden dollar slide by abruptly ending intervention.

WHAT KIND OF TACTICS ARE THEY LIKELY TO EMPLOY?

After the shock and awe of the first day, further intervention is likely to be more tactical and opportunistic.

If the dollar stabilizes above 85 yen there may be no need to act. But if it starts to fall again on selling by hedge funds and other speculators, the authorities may show themselves somewhere between 83.00-85.00 yen.

Traders say the uncertainty that has been created could last for a week or two, but if there is no follow-up action and the dollar remains under broad pressure — for instance, from expectations of more Federal Reserve quantitative easing — selling pressure will build again.

In that case, market players do not rule out chances of the authorities waiting for the market to become quite short dollars before springing a trap.

JP Morgan notes, however, that intervention can bring its own problems: it attracts those keen to unload large dollar positions, especially at a time when many people think the dollar is likely to fall further.

Intervention also tends to suppress volatility, allowing big positions to build up that may result in bigger price swings when authorities back away.

HAVE THE MOF/BOJ DRAWN A LINE IN THE SAND?

Probably not. Japanese authorities would likely try to avoid giving the impression they are defending a particular level.

This week the government’s spokesman, who has no say on FX policy, was asked if the 82 level was the level being defended after intervention occurred there. The response: he believed the finance minister thought so.

But Tokyo market players took this comment in stride because if specific levels were cited they would become targets. Finance Minister Noda says they are not targeting a specific level.

HOW MUCH CAN THEY DO?

Japan raised its borrowing limit for forex intervention in the budget for fiscal 2010/11 by 5 trillion yen to 145 trillion. Before the first round of yen selling on September 15 the funds available were roughly 35 trillion yen ($408 billion).

Kyodo news agency has reported that Japan is considering increasing the amount of funds available for FX intervention but did not cite a specific figure.

Analysts say the authorities cannot intervene for long as heavily as they did the first time, but there is plenty of money for a few more rounds of large-scale intervention.

WILL BOJ BOOST BALANCE SHEET?

The BOJ is expected to hold off draining yen that swashed into the currency market in Tokyo’s yen-selling intervention.

The move will temporarily boost commercial banks’ current account deposits parked at the BOJ, which used to be the target when the central bank’s quantitative easing policy was in place for five years until 2006.

Unsterilized intervention may filter into the bond market and push down yields. But the effect on the economy and deflation will be limited as long as the abundant cash does not foster fund demand and bank lending. The money will simply accumulate at current account reserves parked at the BOJ.

DOES THIS SIGNAL A MORE PROACTIVE STANCE TO FIGHT DEFLATION?

With the government having played its part in curbing yen gains with intervention, it may pile pressure on the BOJ to take further action to beat deflation.

The BOJ is well aware and may ease monetary policy at its next rate review in early October. An increase in outright government bond purchases has been floated as among the more likely options, sources say.

The central bank has been hesitant of increasing bond buying from the current 21.6 trillion yen per year, fearing that it would be seen as printing money to finance public debt. But it may not have much choice if the effect of intervention begins to fade, heightening pressure on the BOJ for more action.

($1=85.81 Yen)

Additional reporting by Kaori Kaneko and Leika Kihara; Editing by Eric Burroughs and Michael Watson

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