This is an update on my recent post about the sharply appreciating yen.
About a week ago, the Bank of Japan intervened in the currency markets. It reportedly spent about $20 billion in a (so far) successful attempt to depress the value of the yen against the US dollar. And as the dollar began to give back some of its 4% gain against the Japanese currency this past week, in response to the Fed’s indication it hasn’t ruled out further quantitative money easing, the BOJ is hinting it may not be done.
Experience and financial theory both tell us that intervention can do no more than buy a little time for a country to implement structural change. But Japan shows no signs, to me anyway, of wanting to reverse its stance that preserving a traditional social order is its preferred alternative, even if it involves economic senescence. So the money spent on currency intervention is ultimately wasted. The BOJ certainly knows this.
The move wins Tokyo no friends in Washington, which is trying to pressure China into allowing the renminbi to rise.
Why intervene, then? I think it’s an issue of partisan politics. The Democratic Party of Japan was swept into office last year in a mandate for change from the corrupt money politics practiced by the Liberal Democrats. This shows voters’ extreme dissatisfaction with the LDP, since one of the DPJ’s leading lights is Ichiro Ozawa, who has long been associated with back-room money politics.
Having somehow escaped involvement in a recent corruption scandal that forced then-Prime Minister Hatoyama to resign, Ozawa decided to emerge from the shadows and challenge the new PM, Naoto Kan, for leadership of the DPJ. Ozawa was resoundingly defeated.
I think the intervention was the price Mr. Kan had to pay to sway the votes of JDP party stalwarts in the Ozawa faction. The timing of the intervention is one reason I’d cite in support of my opinion. The second is the willingness of the BOJ, an independent body, to go along with an ultimately futile gesture. However odd the present DPJ government, it’s certainly better than an Ozawa-led one–or a return to the LDP.
The BOJ has supposedly drawn a line in the sand at $1 = ¥ 82. The parties seeking to push the yen higher are supposedly not the major global commercial banks but Japanese individual margin players. If so, further substantial intervention may not be needed to maintain the status quo. After all, the government can always tighten margin requirements.
From an equity investment point of view, however, the fact that the value of the yen is not front-page news shows how far into irrelevance the Japanese economy has fallen. To my mind, Tokyo is now a special situation market, driven by smaller counterculture” firms. They actually benefit from a stronger yen.