- On Monday, the G7 finance ministers and central bank governors took the extraordinary step of releasing an unscheduled statement. The announcement was brief, and to the point: “We are concerned about the recent excessive volatility in the exchange rate of the yen and its possible adverse implications for economic and financial stability.” The concern raised by these countries has given way to talk about the potential for coordinated intervention in the foreign exchange markets. While the probability of a joint move from the G3 in the currency markets is small, the possibility is not ruled out that unilateral effort from Japan if the yen’s appreciation were to continue even though their ability to halt or significantly reverse the yen’s climb may be limited.
- It is unlikely that policymakers in Europe or the US view the present situation in the foreign exchange markets as problematic. Indeed, there was a noticeable absence of any mention of the dollar or the euro in the G7’s Monday announcement. Later in the day, French Economy Minister Christine Lagarde clarified the statement in a televised interview by saying that the G7 are not planning to intervene by selling the yen, but explained the G7 statement as a signal of support for “possible intervention of Japanese authorities knowing this would be about a purely Japanese intervention.” However, by suggesting that the other G7 countries would not materially aide their Japanese colleagues, Madame Lagarde seemed to be implying that the G7 do not wholly support an attempt to alter present levels of exchange rates. On the other hand, it would be difficult for American or European officials to express much opposition to a Japanese desire to halt the yen’s appreciation at a time when American and European officials continue to “intervene” in other areas of their own financial markets.
- The yen’s recent appreciation has brought the TWI JPY from being undervalued in mid-July to now being within a few points of fair value. The Japanese MoF would therefore have little supporting evidence for a claim to their G7 counterparts that the JPY is fundamentally misaligned. In terms of the real economy, neither the US nor the Eurozone would derive much benefit from intervention.
- In the present environment, the appreciating dollar will allow the Federal Reserve to continue easing monetary policy to cushion the real economy with less concern about the dollar going into freefall on the back of falling interest rates. In addition, an effort to weaken the dollar against the yen or the core European currencies could potentially cause greater instability in other areas of US capital markets.
- The United States remains dependent on foreign savings to fund its large current account deficit, and weakening the value of the greenback could deter foreign investors from near-term purchases of US assets. Similarly, it is unlikely that much concern exists in the corridors of the ECB and European finance ministries about the slide of the EUR, which could provide some stimulus to the net exports for the single currency zone. The value of the exchange rate and its effect on the real economy seem to presently be a matter of concern for only the Japanese with their merchandise trade balance having fallen into deficit in August and September for the first time in over twenty years. In this context, the MoF could be tempted to intervene in a unilateral fashion if USD/JPY were to drop below 90.
- However, it is unclear that unilateral intervention would even prove successful, and a “failed” operation could leave the financial authorities in Japan looking powerless. The appreciation of the JPY has not been driven by speculative forces.
- Given that there are no signs that speculative positioning has become extreme, there is limited potential for Japanese officials to “squeeze” many players out of the market as most of the recent JPY appreciation appears to be due more to a repatriation bid and the hedging activities of Japanese institutional investors than to the activities of speculative players. As such, while intervention from American or European officials seems rather unlikely, the limited probability of success if the MoF were to intervene in a unilateral fashion puts into question any potential moves from even the Japanese.
Coordinated Currency Intervention Unlikely
October 28th, 2008 · No Comments
Tags: Forex Market
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