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Guest Commentary: A Weaker Yen - Gently Does It

Guest Commentary: A Weaker Yen - Gently Does It

2012-05-16 04:00:00
Jonathan Granby,

The strength of the Japanese yen loved by shoppers is hated by the Japanese administration, politicians and corporations. The head of Nissan recently said that yen strength is like a “1,000-pound gorilla” that scuppers our ability to sell cars abroad.

After having embarked on several bouts of intervention, some in coordination with other central banks, to weaken the yen and repeatedly boosting the size of its asset-purchase program the Bank of Japan (BOJ) and Ministry of Finance (MOF) are taking a more subtle approach. Late in April the asset-purchase plan was increased again, by another ¥5 trillion, and the maturity of government bonds was extended from two to three years. Action, which comes after special easing measures in February which resulted in a significant weakening of the yen, and is believed to be aimed at currency markets.

The finance ministry has been playing its part too. The IMF is set to boost its funds by $430 billion in an effort to lift concerns that the institution doesn’t have the fire power to contain the EU debt crisis. The Japanese finance ministry is the single largest contributor to the increase. This is a surreptitious move on the MOFs part to weaken the yen indirectly. When the euro crisis worsens and investors panic they usually flee into safe haven assets, of which the yen is one, strengthening the currency. It is in Japan’s interest that investors believe that the IMF can contain the crisis and exit their safe haven positions allowing the currency to weaken.

Politicians have entered the fray too, calling on the BOJ to take further action to weaken the currency. Politicians have lately been pointing to figures that show that the BOJs asset-purchase program is significantly smaller than other major central banks’ (it’s about two-thirds of the Federal Reserve’s program and less than half the ECBs purchases). The BOJs obstinance toward expanding their asset-purchases further has rankled politicians who are threatening the central bank with reforms that could curb its independence; threats that are foolish at a time when the administration needs to work harmoniously.

The central bank continues to remind politicians and investors alike that it doesn’t have a magic wand which can be waved. It also warns against monetising debt by printing money. This doesn’t mean that the BOJ has no tricks left up its sleeve; some perceive the hefty IMF contribution as an effort by Japan’s leadership to smooth the way for further overt currency intervention (or manipulation) which usually draws the ire of the international community.

The strength of the yen despite all these efforts suggests that global risk appetites have a bigger influence on the market than the BOJ. The BOJ may not be able to control the trend that currency markets have adopted even if it employs more subtle tactics. All that remains is the possibility of mimicking the SNBs model and establish a floor that will be defended at all costs.

Written by Jonathan Granby

Jonathan is a weekly columnist for DailyFX.com. He is currently pursuing his master’s degree and working with Dr. Paul Rivlin studying economic development in MENA, with a particular focus on trade between the MENA region and China. Jonathan has previously held positions in financial services and public policy.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.


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