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Foreign Exchange

Intervention fears rise as Japan expands FX war chest

The Japanese government on Tuesday increased the amount it is allowed to borrow from the market to finance foreign exchange intervention, raising speculation that Tokyo could be planning to intervene to weaken the yen over the holiday period.

The government announced it would increase its FX war chest by lifting the ceiling for Financing Bill issuance for yen-selling intervention from ¥165 trillion to ¥195 trillion in its fourth supplementary budget. It echoed a similar move from Tokyo to improve its FX capabilities in its third supplementary budget in October, when it raised its war chest by ¥15 trillion ahead of the record yen-selling intervention it undertook on October 31.

Analysts said, given that Tokyo had only used up about ¥125 trillion of its original fund, it still had a substantial ¥70 trillion to deploy in the currency market.

The yen is the best-performing large currency during the past six months and year to date, benefiting as rising concerns over the global economy have prompted Japanese investors to liquidate positions in risky assets and repatriate funds.

Evidence of growing risk aversion amongst Japanese investors, which dampens demand for foreign assets and supports the yen, has been provided by the latest monthly report from Japan’s Investment Trusts Association.

It revealed the largest net redemption, totalling ¥406 billion, from publicly offered investment trusts since October 2008. The share of foreign currency assets as a percentage of total value of publicly offered investment trusts has fallen to around 40%, its lowest level since October 2006.

 Japan has more funds available for intervention

 Source: Japan MoF, Barclays Capital

Chris Turner, head of FX strategy at ING Financial Markets, said the government might act to weaken the yen in holiday-thinned markets during the coming week, a move that could come alongside further monetary stimulus from the Bank of Japan, which concludes its policy meeting on Wednesday. “Any BoJ easing could usher in massive intervention over the holiday period,” he says. “Do not go home short USD/JPY.”

However, some believed Tokyo was merely ensuring it had the capability of fighting further strength in the yen, rather than signalling its intention to intervene imminently in the market.

“Given the current situation of reduced downward pressure on USD/JPY due to general dollar strength and the run of better-than-expected US economic data, the increased intervention ammunition looks sufficient for several months,” says Masafumi Yamamoto, strategist at Barclays Capital.

“The purpose of this increase is more to indicate the willingness of the Japanese government to fight a stronger yen, if needed.”

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