Japanese Finance Minister Jun Azumi said today that the government will lift the limit of the Financing Bill (FB) issuance for JPY selling intervention to JPY165trn yen (USD2.2trn) from the current JPY150trn in the third supplementary budget, which is likely to be formed in October. Currently, the room for further JPY selling intervention is estimated at around JPY23.5trn (USD307bn: JPY150trn minus JPY122trn of outstanding issuance as of end-June and estimated intervention of 4JPYJ.5trn on 4 August). The planned increase will lift the government’s intervention war chest to around JPY38.5trn (USD503bn), almost as large as the total intervention conducted during 2003-04.
For background, FX intervention is decided by government (BoJ executes transactions on behalf of MoF) and uses government funds; therefore, the government needs the JPY funding to sell JPY in the FX market. JPY funding will be accomplished by issuing short-term Financing Bills, and the government sets the limit for FB, usually in the annual budget plan.
The main reason for lifting the limit, in our view, is to show that Japan has sufficient room for JPY selling intervention, if needed, and keep the market wary of potential intervention, especially given that recent large-scale, one-day unilateral interventions (JPY4.5trn on 4 August and JPY2.1trn on 15 September 2010), which meant that the current war chest could be exhausted after a similar amount of daily intervention for one week. The increase does not necessarily mean the government will conduct JPY selling intervention soon. We think the Japanese government’s current intervention stance – stepping in only when large JPY appreciation causes significant deterioration in the country’s economic outlook and share prices, but in large size – will not change. This increase (JPY15trn) appears modest compared with the increase in FY2003 and FY2004 (JPY31trn and JPY40trn, respectively), suggesting that the government is not considering a “shock and awe” approach using a series of sizable interventions, as was the case during 2003-04. For potential triggers, we think it is worth watching the level of EUR/JPY breaking 100 yen and Nikkei below 8,000.
Figure: FBs: issuance vs ceiling
Note: Latest figure for actual FB issuance is our estimate.
BARCLAYS CAPITAL