Expectations Grow On Yen Intervention

Ben Bernanke’s decision to launch another multibillion-dollar round of asset purchases to revive the US economy has put his Japanese counterpart, Masaaki Shirakawa, firmly in the spotlight.

Before the US Federal Reserve threw the covers off “QE3”, many were counting on more action from the Bank of Japan at the end of October, when the bank is to update its forecasts on growth and inflation.

But now, amid renewed talk of currency intervention from Japanese politicians and strong rumours of a price-checking operation by the BoJ last week to contain a surging yen, there is a growing feeling that the easing cannot wait.

That feeling has been reflected in the value of the yen, which came close to monthly lows against the dollar at Y79 ahead of the start of a two-day policy meeting on Tuesday headed by Mr Shirakawa, BoJ governor.

“Expectations of some kind of action [this week] are rising,” says Masafumi Yamamoto, chief foreign-exchange strategist at Barclays in Tokyo.

“There are a number of good excuses to be more dovish,” he says, among them a flagging economy and a ruling party more interested in its own survival than co-ordinating some kind of fiscal stimulus.

But analysts agree that the most powerful argument for further easing is the all-conquering currency. The yen is still within 3 per cent of the record nominal high against the dollar it touched last October, having gained almost 40 per cent against the US currency since June 2007.

At the moment, say analysts, interest rate differentials are simply not wide enough to encourage much yen-selling. Mr Bernanke’s pledge to supplement the Fed’s holdings of long-term securities with open-ended purchases of mortgage debt has kept the gap between yields on two-year Treasuries and two-year Japanese government bonds — a key indicator for the dollar/yen rate — at about 15 basis points in favour of US bonds, where it has been for much of the past year.

Scrapping the minimum 0.1 per cent bidding yield for the BoJ’s longer-term bond purchases could be one way of helping the yen to break decisively lower against the dollar, notes Naohiko Baba, chief economist at Goldman Sachs in Tokyo.

In July, the BoJ abolished a 0.1 per cent yield floor on purchases of notes up to one year. In anticipation of the BoJ doing the same for its purchases of longer-term bonds, investors have been piling into Japanese debt with longer maturities. Three-year JGBs are current yielding 0.098 per cent.

The BoJ’s removal of the minimum bidding floor “is only a matter of time”, says Shogo Fujita, chief bond strategist at Bank of America Merrill Lynch in Tokyo. “They should, so as not to add to market stress.”

More radical ways of unsettling the yen could involve another Y10tn expansion of the asset-purchasing programme, the first since February, or a commitment to examine radical policy proposals such as buying foreign bonds — an option known to be favoured by Takehiro Sato, one of two private sector economists recently appointed to the bank’s policy board.

“Many people are starting to think that the BoJ is too much of a yoiko, or good child, in terms of its policies,” says Takako Masai, FX strategist at Shinsei Bank in Tokyo. “All central banks have been trying new things — except the BoJ.”

Compared with its developed economy peers, the BoJ has been “parsimonious” in its easing, agrees Sean Darby, chief global equity strategist at Jefferies in Hong Kong.

Japan’s monetary base — the total amount of banknotes and coins in circulation and current accounts deposited at the BoJ — stood at an average Y121.2tn in August, up 36 per cent since pre-Lehman levels. Contrast that with the US, which has more than tripled its monetary base since Lehman’s collapse, while the eurozone’s monetary base has almost doubled.

In Japan, currency policy is the responsibility of the government rather than the BoJ. However, market participants have noticed that Mr Shirakawa has begun to speak more freely of the negative effects of a strong yen, singling out the hollowing-out of Japan’s industrial base and a decline in longer-term growth expectations.

If that implies a stronger linkage between monetary policy and foreign exchange policy, then Japan Inc would welcome it.

On Friday, Akio Toyoda, Toyota president, said that the current level of the currency “goes well beyond the limits of what companies can do through efforts to cut costs”.

While most observers expect the BoJ to hold steady on Wednesday, keeping interest rates near zero and the asset-purchasing programme at a total of Y70tn ($889bn) by June 2013, from about Y58tn now, some would love to be surprised. Last week’s action from Bernanke was “an aggressive manoeuvre, taking on all-comers”, says Itay Tuchman, head of FX at Citi in Tokyo. “We haven’t seen the same level of decisiveness out of the BoJ.”

CNN