The MoF surprised the market by stepping in to sell JPY in the Tokyo morning session today, pushing up USD/JPY from around 77.30 to 79 yen so far. Finance Minister Noda confirmed the government’s action. We have been arguing that now is not the best timing for intervention to maximize effectiveness – before risk events like the US NFP release this Friday, a potential downgrade of US sovereign debt by rating agencies, and additionally the FOMC meeting next week (9 Aug) as expectation for QE3 grows, all of which may result in a weaker USD and reduce the effectiveness of intervention. The SNB decision yesterday to address the stronger CHF could also have a supportive effect on JPY, as CHF is now less easy to use as a safe haven currency in a risk-off environment and markets may well seek alternatives, like USD and JPY.
Considering that Japanese authorities are well aware of this environment, today’s action suggests that the MoF intends take action repeatedly, reducing the near-term chance of USD/JPY falling below the all-time low of 76.25 on 17 March and our 1m forecast level of 75 yen. As we noted earlier (FX Instant Insight: JPY: Buying time with verbal intervention) the maximum potential amount of JPY intervention selling is around Y39trillion yen. This seems sufficient for repeated large-sized daily interventions for a month (assuming Y2trillion/trading day), but the government may increase the limit of intervention further by raising the annual limit of Financing Bill issuance, currently set at Y150trilion, when the third supplementary budget is scheduled in September, or sometime after a new Prime Minister is chosen. (For the mechanism of JPY selling intervention, please refer to FX Weekly Special: Practical aspects of JPY selling intervention, 10 September 2010).
The BoJ also decided to shorten its two-day monetary policy meeting scheduled for today and tomorrow, and will announce the results today. Various media outlets have reported that the BoJ may announce an expansion of its asset purchase fund by Y5-10 trillion yen, so the BoJ is now expected to expand the asset purchase fund by larger amount so as not to disappoint the market. To get a sense of the BoJ’s aggressiveness in terms of easing, it will be worth watching how the pace of the purchases is accelerated, by frontloading the deadline of the purchase, currently set for June 2012. The BoJ is likely to increase the current account balance (deposits by private sector financial institutions at the BoJ and part of the monetary base) by the amount of intervention, to show that the JPY selling intervention is unsterilized. This should happen next Monday, when the settlement day for today’s intervention arrives.
BARCLAYS CAPITAL
ECONOMICS RESEARCH | INSTANT INSIGHTS