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Foreign Exchange

JPY intervention risk “flashing red”

Pressure from Japan’s G20 partners will be no impediment to intervention, as the yen closes in on record levels against the dollar, says Bank of Tokyo-Mitsubishi UFJ (BTMU).

USDJPY traded down to a low of ¥76.02 on Thursday, just shy of the post-war low of ¥75.35 that triggered record intervention from Tokyo in October 31, as it fought to protect its exporters from the rising currency. Japan’s finance minister Jun Azumi and Masaaki Shirakawa, governor of the Bank of Japan, made it clear to the country’s parliament on Thursday what was driving USDJPY lower – last week’s decision by the Federal Reserve to extend the timing of maintaining US interest rates at “exceptionally low levels” to the end of 2014.

Azumi added he saw evidence of “speculative moves” in the FX market – always a key determinant of previous decisions to intervene by Japanese authorities, according to Derek Halpenny, head of currency research at BTMU.

The conditions under which the G20 allows intervention were not adhered to when Japan intervened on October 31 – and possibly covertly for a few days afterwards.

The G20 statement on October 15 – its most recent – reiterated its support for “market-determined” exchange rates, while noting that “excess volatility and disorderly movements” in exchange rates had adverse implications for economic and financial stability.

“So, some argue this statement will curtail Japan from acting again,” says Halpenny. “We find the logic of this difficult to understand.”

He says the Japanese government clearly chose to ignore the G20 on October 31, when it is estimated it sold approximately JPY7 trillion to JPY8 trillion.

“Three-month implied at the money volatility [in USDJPY] was just below 10% on October 31 and the foreign exchange market was relatively calm,” adds Halpenny.

“So the obvious question is why would Japan give the G20 statement greater weight now than back in October/November, which was a little over two weeks after the statement was released?”

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