Yen-Dollar – Japan to Face ‘Full Force’ of Market on any Intervention

Japan will have to take on the “full force” of the market should it act to weaken the yen again after trading volumes versus the dollar returned to levels seen before its September intervention, UBS AG said.

Hedge funds clients “suddenly and dramatically” became cautious of trading in the currency pair after Japan intervened in the foreign-exchange market on Sept. 15 for the first time since 2004, the bank said. Two-way flows in dollar-yen have since been restored as benchmark 10-year Treasury yields began rising in November and reached a six-month high this week, Gareth Berry, a Singapore-based currency strategist wrote in a note to clients yesterday.

“We have seen a sharp revival in two-way flow in dollar- yen since U.S. yields began to trend higher,” Berry wrote. “If U.S. yields fall back, even temporarily, and Japan is forced to intervene again to support dollar-yen, the Ministry of Finance will have to push against the full force of a market that has fully regrouped.”

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Japan and a strong yen

For Yoshihiko Noda, Japan’s finance minister, the G20’s weekend warning against disorderly exchange rate movements suggested the yen might enjoy a "more stable" relationship with the dollar and euro.

That looks unlikely — at least if your definition of stable means an end to the Japanese currency’s climb against the greenback, an ascent only briefly interrupted last month by Tokyo’s massive yen-selling market intervention.

Last week’s gathering of G20 finance ministers and central bankers in South Korea may even have accelerated the shift, as market participants think the vaguely worded communiqué will make further currency interventions by Japan more difficult. On Monday the dollar fell more than 1 per cent against the yen to a new 15-year low of Y80.41. The US currency is now within sight of its Y79.70 postwar low.

So if the G20 consensus cobbled together in Seoul has not tamed the markets, what can Tokyo do now?

There is no doubting the concern in policymaking and business circles about the implications of a stronger currency for Japan’s faltering recovery.

Read the rest of the story: Japan looks to life with strong yen.

Japan Acts to Weaken the Yen

Japan moved on Wednesday to prop up the dollar and weaken the yen in a bid to protect its export-led economy, intervening in international currency markets for the first time since 2004.

The Japanese monetary authorities bought dollars and sold yen, pushing it to about 84.50 yen to the dollar in the morning from near 82 on Tuesday.

The maneuver came after Prime Minister Naoto Kan’s victory over a member of his own party in a partywide ballot on Tuesday. Analysts had initially predicted that the win by Mr. Kan, who had been less explicit about the need for intervention than his challenger, would not likely lead to action in currency markets.

The intervention also runs counter to a recent trend among the world’s major economies to stay away from market manipulation and let markets decide the strength of their currencies.

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The Yen and the Carry Trade looking ripe

On Monday it was reported that the Japanese output gap stood at a -6.4%, worse than the preliminary reading of -6.1%. This output gap is designed to measure how much the domestic product deviates from the potential gross domestic product. A negative number suggests that demand is lagging behind supplies, leading to deflationary pressure. Considering the demography of Japan, and much less consumption by an aging population, this should not be a surprise.

Deflationary pressure is a real threat in Japan, and the Japanese Prime Minister and the Minister of Finance have been leaning on the Bank of Japan to do something. Today the BoJ kept the three month rate at 0.1 percent, and increased the short term lending to banks by 20 trillion yen or $220 billion.

Read the rest of the story: Bank of Japan Policies Makes Yen Attractive to the Carry Trade