Currency intervention takes many forms but one of the most effective early actions is jawboning the currency lower. The cost is zero as long as you have creditability to back your threat. The Minster of Finance Nakagawa said he is "keenly watching" the yen market and "has the means" to take action. You do not need a translation. He has a big wad of cash and is willing to use it if he has to.
The market reaction was swift with the yen falling. This causes speculators to cut positions and reduce their buying. The threat creates two-way trading flows instead of the single direction we have been getting, but there are headwinds which work against a softer yen. The US quantitative easing is pushing rates lower in the US than in Japan. Why should any Japanese investor hold dollars. The flight to quality during a global recession also continues. Financial flows are moving back to surplus countries like Japan. Trade flows have also slowed given the recession in major markets with less exports and imports.
During periods of stronger yen appreciation there is a desire by the MOF to help exporters. With weak demand, change in yen values will not effect trade; however, jawboning will slow the direction and may allow exporters to better prepare for an overall stronger yen in 2009.
Remember the yen was 110 in August and at 100 at the beginning of the last fiscal year. We are not going to see yen levels above 110 like 2007 for a long time but something closer to 100 would be more acceptable for exporters. The MOF has intervened in the past in the 105 area but the economic environment is much different even if you have the means to move the market.
The market reaction was swift with the yen falling. This causes speculators to cut positions and reduce their buying. The threat creates two-way trading flows instead of the single direction we have been getting, but there are headwinds which work against a softer yen. The US quantitative easing is pushing rates lower in the US than in Japan. Why should any Japanese investor hold dollars. The flight to quality during a global recession also continues. Financial flows are moving back to surplus countries like Japan. Trade flows have also slowed given the recession in major markets with less exports and imports.
During periods of stronger yen appreciation there is a desire by the MOF to help exporters. With weak demand, change in yen values will not effect trade; however, jawboning will slow the direction and may allow exporters to better prepare for an overall stronger yen in 2009.
Remember the yen was 110 in August and at 100 at the beginning of the last fiscal year. We are not going to see yen levels above 110 like 2007 for a long time but something closer to 100 would be more acceptable for exporters. The MOF has intervened in the past in the 105 area but the economic environment is much different even if you have the means to move the market.
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