March 18, 2011

Japan Needs A Break

As if the human toll and suffering was not tragic enough, Japan also had to endure economic and financial strains unmatched in recent history.  At the beginning of the week, Japanese stocks saw a decline of over 16% within two days. Counter-intuitive to that decline, the Japanese Yen rose to an all-time high against the US Dollar on Wednesday. We examined the initial reaction in the currency markets right after the Japanese Earthquake hit last week.  The rationale for the strength of the Japanese currency was seen in anticipation of massive repatriation of Japanese investment funds from overseas.  On Wednesday,  the US Dollar dropped 300 points within a matter of 15 minutes, only to pull back to where it had started from.  Clearly a speculative attack that prompted a fall below a major technical support level for the US$ versus Yen.   It may have been the ongoing strength or that hard-hitting speculative run on the yen but Japan clearly needed a break.  That break came courtesy of an emergency meeting when the central bankers of the G7 nations agreed on a coordinated intervention in the currency markets.

Yen-G7 Intervention

Currency interventions have a mixed record when it comes to pushing against market forces. As the Financial Times report The G7 and the Yen notes:

The history of currency interventions suggests that solitary action is not enough. In mid-September, for example, when the BoJ went it alone, the sale of ¥2,125bn($26bn) (the biggest-ever one-day intervention) reversed the yen’s appreciation trend only briefly.

Coordinated efforts by numerous central banks have a better chance of being successful in stemming against market forces and slowing down currency trends. However, reversing a trend through interventions even on a scale of some $20 billion may only put a dent in a market that has a combined turnover of several trillion dollars per day (counting all currency transactions). As in past interventions, typically trend-following hedge funds may play the role of the counter-part to Central banks’ efforts.  This week, a long-standing support level at ¥79.75 has been broken.  You have to go back all the way to 1995 when the Yen had its previous record against the US Dollar.  Incidentally, that record occurred a few months after the (in)famous Kobe Earthquake which happened on January 17, 1995.


History may or may not repeat itself.  It looks though as if some large speculators have been placing their bets on an ongoing Yen strength, despite the threat of currency intervention.  For now the Yen strength has been put to a temporary halt.  The week-end may present some additional impetus in the form of official G7 support statements and/or additional efforts by the major central banks.  I sure hope that Japan’s nuclear threat can be contained so that the healing and re-construction efforts can begin in the devastated regions.  Japan really does need a break and so does its capital market.

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