[LFX]

In the past few weeks, two currencies have moved sharply due to official "jawboning" – the Japanese yen (JPY) higher and the British pound (GBP) lower. In the first case, the JPY has gained 4.24% against the US dollar (USD) and 1.94% against the euro (EUR) since the start of September in the wake of the DPJ election victory and a markedly different tone on FX from incoming Finance Minister Hirohisa Fujii. In the past two weeks, Fujii has made two comments to the effect that a strong JPY is generally positive because it boosts Japanese purchasing power and that the recent FX market trends were not “abnormal.” Subsequently, he qualified both comments after JPY gains accelerated, but the market has been left with the distinct impression that an important change in Japanese FX policy is taking place, boosting the value of the JPY. By contrast, the GBP has been pushed sharply lower following a series of comments by Bank of England (BoE) officials. From 6 August, the GBP has fallen 6.32% against the USD and 7.84% against EUR. While the Federal Reserve has sounded quite optimistic on recovery prospects, the BoE has been much more cautious, seemingly downplaying the strength of the UK recovery and warning that any sustained rebound will be a long, drawn-out affair. Moreover, the BoE has – rightly or wrongly – been seen by the market as having actively talked down GBP to support exports at a time of failing domestic demand. For instance, after commenting that the “strength and sustainability of the (UK) recovery is highly uncertain,” BoE Governor King was reported as saying the decline in the value of the GBP was “very helpful” in rebalancing the UK economy. There are important differences between these two cases. Firstly, the Japanese comments were not accompanied by policy actions. By contrast, the BoE comments were accompanied by an increase in the quantitative easing programme to GBP 175bn from GBP 125bn on 6 August – the day which marked the exact high in GBP against major currencies. The QE programme has helped to push UK market rates lower, thus putting the GBP under fundamental pressure. Secondly, the new Japanese Finance Minister is referring to medium- to long-term policy priorities when he refers to potential positives from JPY strength. This is why he has qualified his comments each time after JPY gains. He is NOT trying to create a sharp appreciation in the currency over the short term – and those market players who think he is may get badly burned if they try and chase this JPY move too far. A stronger JPY will help to rebalance the Japanese economy away from exports, but this is a multi-year event. Meanwhile, in the short term, Japan needs to be careful not to allow for excessive and overly rapid JPY strength. For its part, the UK does not have an official policy to devalue its currency, but clearly a weaker currency should help to rebalance the economy – as officials have rightly pointed out. Over the medium term, the combination of these two policy priorities continues to support medium-term GBP-JPY weakness.