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Foreign Exchange

Japan’s Watanabes might curb BoJ’s $58bln intervention

As the dust settles after the Bank of Japan’s currency intervention this week, positioning data from some sectors of the market suggests that the authorities might face some headwinds in their quest to depreciate the yen.

‘Mr and Mrs Watanabe’, the collective term used to describe Japanese retail margin foreign-exchange traders, have been large sellers of the US dollar and other foreign currencies against the yen following the intervention, as they sought to take profit on their positions. According to data from the Tokyo Financial Exchange (TFX), net dollar-long/yen-short positions as of August 4 decreased by ¥89.3 billion ($1.2 billion), or about 30%, from the previous day, and similarly total net long foreign-currency positions versus the yen fell by ¥186.7 billion, or about 23% (see graph).

This shouldn’t come as a surprise to the authorities, given the fact that Japanese retail investors tend to be contrarian traders and the BoJ should have factored this in when deciding on the size of the intervention, says Barclays Capital in a note today.

Nonetheless, it could pose a headache for the authorities as they seek to weaken the yen against the dollar. Citigroup adds that Japanese authorities’ key focus will be to monitor the flows of underhedged exporters seeking to sell dollars into the rally, and then resume their usual hedging pace. “We suspect that exporters’ main target is to buy JPY above 80. This suggests to us that the intervention might not provide enough opportunities for exporters to sell at current levels,” say Osamu Takashima and Issei Suzuki of Citi in a note today. They add that retail position squaring will also prevent exporters from catching up with their hedging needs.

While that may be the case for the short-term direction of USDJPY, the behaviour of Mr and Mrs Watanabe is likely to have an even greater impact than it has in the past, argues Masafumi Yamamoto, a Tokyo-based currency strategist at Barclays.

Before the financial crisis, when wider interest-rate differentials made short yen versus any currency a viable and profitable trade, where the general strategy for retail traders was to increase long positions against the yen. It was a dominant force, says Yamamoto. Now, with little prospect of a widening of interest-rate differentials, given the deteriorating global economic outlook, Mr and Mrs Watanabe are becoming more short-term orientated.

“There’s no carry, so they have to chase very short-term moves, which means they’re having a greater influence on volatility than was the case in the past, because they’re much more sensitive to the price moves,” Yamamoto says.

The Bank of Japan is estimated to have bought up to ¥4.56 trillion yesterday in its asset-purchase programme, Masafumi estimates. That figure would be more than double its previous largest unilateral intervention of ¥2.13 trillion in September 2010.

According to the BoJ’s Sources of Changes in Current Account Balances report for August 8 – settlement day for yen sold – the JPY amount supplied to the market by the intervention transaction stands at ¥4.46 trillion.

The BoJ is likely to leave the yen supplied by the intervention in the market and allow the current account balance to rise by ¥4.76 trillion on Monday (August 8) to ¥32.3 trillion. This would mean that the intervention is unsterilised, like last September's, in line with market expectations.

BarCap estimates that, before this week’s action, Japan had around ¥39 trillion available for intervention, so it now has about ¥34 trillion left, enough for seven further days of intervention at the same pace.

The government could top up JPY selling by lifting the limit on financing bill issuance, BarCap notes, though it says it doesn't expect intervention to remain at present levels.

A last-resort option would be for the Ministry of Finance to ask the BoJ to finance JPY using its US Treasury securities holdings as collateral, a measure it last took during 2003-04.

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