Did the MOF Signal No More BOJ Intervention (Near-Term)?

Japan’s Finance Minister Noda has indicated that he will take advantage of the upcoming G7 and IMF meeting to explain its Sept 15 intervention. While US Fed and Treasury and the ECB did not comment on the intervention, several others did, including Eurogroup head Juncker, US House Ways and Means Committee Chairman Levin, and the heads of the IMF and WTO. Those comments were largely critical. The fact that he feels compelled to explain, would suggest that there won’t be intervention until this explanation is delivered.

The basis for the explanation is clear. Contrary to conventional wisdom there are two pillars to G7 currency policy: flexibility and avoidance of excessive fluctuations. Japanese intervention was clearly an attempt to achieve the latter objective.

Noda will also seek to differentiate Japanese actions from the Chinese. One key difference is that the yen is over-valued from most academic models of valuation, like purchasing power parity, real equilibrium exchange ranges and fundamental equilibrium exchange rates. Second, Japan has deflation. A strong currency exacerbates this. China has inflation. Indeed, by not sterilizing the intervention, the BOJ eased monetary conditions on the margin. Third, today’s adoption of zero interest rate policy and the JPY5 trillion of asset purchases shows the intervention was backed by a policy adjustment. The same cannot be said of China.

Some objections were aired over the unilateral aspect of the BOJ’s intervention. This seems to be a weak criticism in that it would give the US and Europe a veto over the conduct of Japan’s monetary policy and fx regime. Besides telling Japan to do nothing and suffer with a dramatic appreciation of the yen, most of the critics do not offer an alternative to Japanese officials. However, Japanese officials seem reluctant to face to much criticism and know that a comment by the US or Europe could undermine the prospects of a successful operation.

Lastly, Japanese officials seem to recognize that a key weight on the dollar is the drop in US interest rates. If Japan intervenes, buys dollar and buys Treasuries with the lion’s share of the intervention proceeds,doesn’t that exert additional downward pressure on US rates, and bolstering the yen even more, at least on the margins ? Therefore, another round of near-term intervention, perhaps as a follow-up to today’s BOJ moves seems unlikely.