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Politics : Dutch Central Bank Sale Announcement Imminent? -- Ignore unavailable to you. Want to Upgrade?

To: sea_urchin who wrote (7129)	8/13/1999 2:52:00 AM
From: m.philli	Read Replies (2) \| Respond to of 82153

11 Aug 1999 Is Japan about to change yen intervention policy? I NFORMED sources are suggesting that Japan is on the verge of changing its policy on the value of the yen. Fears over the large unhedged holdings by Japanese investors in euro-denominated assets have been reduced by its recent recovery. In addition, the practicality of intervention is questionable given the force of present flows. Indeed, Japanese policy makers are even questioning the efficacy of keeping the yen weak to retain competitiveness and combat deflation. However, Japan's Vice-Finance Minister for International Affairs Haruhiko Kuroda cannot be seen to have been defeated in his first battle with the market. So, while we anticipate further US dollar losses in the near term, this could first inspire significant intervention by the Japanese before they allow a market-driven retracement to 110 type-levels. Euro concerns abate In early June, we suggested that both Japanese and European officials had become increasingly concerned with the large unhedged investments of Japanese investors in euro-denominated fixed income assets. Indeed, Japanese authorities intervened exclusively through European central banks to buy the euro against the yen on June 18 from around the 122.80 yen level. Though the euro has since been back below these levels, what the intervention did achieve was to awaken the European Central Bank (ECB) to protecting the value of the euro which -- prior to this intervention -- looked set to breach parity versus the US dollar. In our opinion, the intervention and the subsequent hawkish rhetoric from ECB has done enough to placate Japanese investor fears that the euro was about to sink and has restored some (moderate) credibility to the infant currency. The impact of intervention Given that the key concern on euro-yen has to some degree abated, Japanese policy-makers are left to ponder the merits of intervening to buy US dollars against the yen. Of course, Japan's Ministry of Finance (MOF) believes it is important to prevent "premature" yen strength which might damage a nascent economic recovery. However, sources now tell IDEAglobal.com that the yen policy might be changing. In particular, the MOF has been unable to fight the flows out of the US dollar. The Bank of Japan (BOJ) has bought well over US$30 billion (S$50.1 billion) over the last eight weeks and yet has been unable to prevent a six-yen fall in the US dollar's value. Not helping their efforts were: Market conditions: where currency overlay managers have sold billions of US dollars to adjust their portfolios from short yen to neutral; The new US Treasury Secretary Lawrence Summers who, on July 7, undermined BOJ intervention with a comment that Japan should allow market forces to operate and not manipulate currencies. Despite this, sources tell us that Japanese authorities are increasingly coming around to the view that manipulating a weaker yen merely cements a lack of competitiveness among Japanese exporters, which cannot be a long-term solution. Indeed, Monday saw Toyoo Gyohten, former adviser to the prime minister, outlining the need for Japan to learn to live with a strong currency -- emphasising the benefits of corporate rationalisation and the lowering of import prices. In fact, we hear another proposition -- that Japan should break deflationary psychology by focusing on the forward dollar-yen rate -- is gaining greater acceptance in Japanese policy circles. Market implications Given that the US Federal Reserve is seen to be increasingly behind the interest rate curve, US assets prices seem more troubled, and Japanese authorities could become more tolerant of a stronger yen -- should the US dollar not quickly break 110 yen support? The wild-card here is the change in guard at the MOF. On July 9, Mr Kuroda formally took over from Eisuke Sakakibara. As always, policy makers have to earn their respect from the market and sources tell us that Mr Kuroda cannot be seen to have failed in his first vital engagement with the foreign exchange market. Thus the risk of a "second round attack" from the BOJ could well materialise "very soon". But such a move may be better seen as more to benefit MOF and BOJ credibility than as an effort to turn the stronger yen trend around. What this suggests is we should continue to see increased volatility over the next four weeks. The US dollar could well range from sub-110 yen levels to as high as 118 yen. But in directional terms, a lower greenback seems most probable first, followed by a quick intervention-led three-yen rally -- and then another reversal lower. This article is extracted from IDEAglobal.com's daily client faxes Contact BT