Yen Intervention May Well be Needed Now
By NICHOLAS HASTINGS
A DOW JONES NEWSWIRES COLUMN
LONDON -- Naoto Kan would be well advised to have a yen intervention plan in place.
Chances are the Japanese currency will once again head higher--this time taking it even above the level it reached late last year, when the threat of intervention became a major issue.
Back then, the new Minister of Finance's blunders and blushes were saved by a turnaround in the dollar's fortunes, as hopes of an early U.S. economic recovery soared and the yen fell back of its own accord.
The dollar, which had fallen under Y85, rebounded back over Y90. See the yen's recent moves against the dollar
However, market conditions are considerably different now from how they were then.
Data coming out of the U.S. have been consistently disappointing in recent weeks.
At the same time, global risk appetite has been hammered by Greece's debt problems, concern over new U.S. banking regulations, tumbling popularity for Obama's administration, the failure of U.S. fourth-quarter earnings to live up to expectations and the uncertainty over Ben Bernanke's reappointment as Fed chairman.
Tohru Sasaki, a currency strategist with JPMorgan Chase Bank in Tokyo, pointed out that the VIX index, a measure of equity market volatility reflecting the fall in risk appetite, soared by 46.2% at the end of last week, the largest two-day increase since February 2007.
Sasaki reckoned that even if the VIX falls back now, past correlation with the Japanese currency suggests that the yen will continue to rise for a while after.
Speculative market positions aren't helping the yen's prospects either.
Short positions in the yen against the dollar are now at their highest level since August 2008, with many taken up when the dollar was above Y90 and so having unrealized losses.
"If dollar/yen declines further from here, those yen shorts may be forced to unwind," Sasaki warned.
There are also signs that as the Japanese economy continues to lag behind other majors, with data later this week likely to confirm continued deflationary pressure, investment interest from foreign investors is on the decline.
"Foreigners are cutting their capital exposure to Japan," strategists at ING Financial Markets reported, noting that this reflects poor profits performance by Japanese companies, higher risk attached to Japanese debt securities and the higher foreign exchange volatility that reduces the allure of carry trades, in which the low yielding yen was once sold in favor of higher yielders.
Of course, the Bank of Japan could respond to fresh deflationary fears with another tranche of quantitative easing that should make the yen less attractive.
But, in a market that is still being driven largely by risk--rather than by rates--the impact of even easier monetary policy would be minimal.
As Steve Barrow, currency strategist with Standard Bank, said: "We think the best strategy, in the short term at least, is to buy the yen."
As this dynamic picks up momentum in coming days, Kan may well find that holding the dollar above Y85 is even more difficult than it was before and a more sustained break towards Y80 is even more likely this time around.
Early Tuesday in Europe, the yen was being pushed lower against the dollar after S&P downgraded the outlook for its "AA" rating to negative from stable. However, the impact is unlikely to last long as most Japanese paper is held by domestic investors who pay little heed to ratings.
Otherwise, the yen remains on the incline--fed by the latest flows after it appears that some Chinese banks have started to reduce their lending, in line with a recent rise in minimum reserves. Although the Peoples' Bank of China has yet to confirm any such move, the prospect of tighter policy in China has lifted risk aversion once again and encouraged investors in safe havens such as the yen.
The negative sentiment was evident in stocks, with the Nikkei losing 1.8% and the Shanghai Composite falling 2.4%.
By 0745 GMT, the dollar is down a little at Y90.15 from Y90.24 late Monday in New York, according to EBS. It had fallen as far as Y89.55 on the China bank reports.
The euro fell to $1.4088 from $1.4162 and to Y126.91 from Y127.79. At one stage it hit a near nine-month low at Y126.12.
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