JPY NEER far stronger than in October last year, led by EUR/JPY
Renewed concern over the Spanish situation has pushed EUR/JPY down to 94 yen, the lowest level since November 2000. Driven by the EUR weakness, JPY NEER has already reached a higher level than just before the largest-ever JPY selling intervention by Japanese authorities, on 31 October last year (Figure 1). Although Japanese Finance Minister Azumi offered the usual rhetoric on JPY today, saying the authorities would take decisive action as needed against speculative and excessive moves and watch the markets closely, the relative silence suggests the Japanese authorities are tending to focus more on USD/JPY than on the trade-weighted level.
Figure 1: JPY NEER is already stronger than last October, while not yet that strong vs USD
Domestic political incentives and international support
However, as the Nikkei stock index has a strong correlation with JPY NEER, general JPY strength should worry authorities sooner or later (Figure 2). With the possibility of a general election looming as soon as September after the passage of the consumption tax hike bill in the Upper House, falling stock markets have negative implication for the administration’s approval rating, and thus we assume the Noda administration would have some incentive to ease such negatives ahead of a possible election, even if the equity market weakness is mainly caused by the European problem. This time international pressure is not unfavorable, as IMF officials such as Managing Director Lagarde and First Deputy Managing Director Lipton have indicated that JPY is moderately overvalued, implying there would not be strong objection from the international community to unilateral intervention by Japan. From Japan’s fundamental point of view as well, persistent and widening trade deficits should ease the once-dominant claim that JPY should be stronger to help offset the global imbalance. Japanese outperformance in terms of growth is not necessarily positive for the currency, as reconstruction-led growth tends to increase imports of building materials.
Figure 2: Nikkei moves in tandem with JPY NEER, downside risk from further JPY strength
Tougher verbal intervention ahead, at least
Against these backdrops, we see the increased chance of JPY selling intervention by the Japanese authorities, or at least verbal intervention with a tougher tone below 78 yen. USD/JPY has already fallen to the lowest level since 1 June, when weaker-than-expected US NFP data pushed the pair below 78 yen, which was followed by a sharp spike caused by heightened market fears of intervention; and it seems the authorities might want to avoid USD/JPY returning to the range of 76-78 yen prevailing in the latter half of last year. Even if the stronger JPY has been driven of late by EUR weakness, we think the intervention will be concentrated in USD/JPY due to its thicker liquidity and expected wider spillover effect to the yencrosses. BoJ Governor Shirakawa met PM Noda this morning to exchange views, but it is uncertain whether the BoJ will deliver additional easing before the scheduled meeting on 9 August.
Barclays Capital