Sunday, January 4, 2009


Is jawboning and intervention in currency markets ever a constructive tool in the monetary policy arsenal? It may move markets in the short term, but eventually it unwinds itself as well as the creditability of the doctor administrating the "medicine". Looks like Japan is ready to make the same mistake it has for the last two decades.

Bloomberg News
Shirakawa Says BOJ May Consider Measures to Address Yen’s Rise

By Fumishige Asano and Masumi Suga

Jan. 4 (Bloomberg) -- The Bank of Japan may consider measures including monetary policy to counter the rising yen as the economy faces severe conditions in 2009, Governor Masaaki Shirakawa said.

“This year will be very tough for the economy,” Shirakawa told public broadcaster NHK today. “The strong yen at a time of rapid decline in the global economy has a big negative impact on our economy in the short term.”

His comments follow signals last month from Finance Minister Shoichi Nakagawa that Japan was ready to intervene in the foreign-exchange market for the first time in four years. With the nation’s economy already in recession along with the U.S. and Europe, the surging yen is adding to pressure on exporters including Japan Toyota Motor Corp., which expects its first operating loss in 71 years.

Technically speaking, they have picked a pretty good spot to jawbone. Whether it breaks the Yen out of the uptrend is up to the markets and up to the magnitude of jawboning and intervention.

Mr. Shedlock over at Mish's Global and Economic Trend Analysis has some excellent pieces on this already. See:

Japan Announces Currency and Stock Market Intervention

Countries are now playing a game of "Top This" to see who can do the dumbest things. Please consider the following: Japan plans to buy $227 billion in shares to boost market

Japan's government said Thursday it is submitting a bill to parliament allowing for the purchase of 20 trillion yen ($227 billion) in stock to help stabilize the Japanese stock market, Kyodo news reported. Under the bill, the Banks' Shareholding Acquisition Corporation, originally created in January 2002, would resume buying shares from banks and other entities, the Japanese news agency reported. The bill would be introduced early next month "with an eye to implementing the measure by the end of March," the report quoted lawmakers as saying.

The Liberal Democratic Party had initially considered just 10 trillion in stock purchases, but the size was roughly doubled to 20 trillion yen at the request of its ruling coalition partner, the New Komeito party, the report said.
If stocks are ready to go up they will. If not they won't. Intervention will accomplish nothing other than create an environment of suspicion that stocks need to be propped up or they would fall. When intervention starts, investors are deprived of normal market signals and will not know if share prices have really bottomed or not. This silliness by Japan is going to create massive mistrust, and massive mistrust is never good for the markets.

More Currency Intervention Madness

Not content with stock market lunacy alone, Nakagawa Says Japan May Take Currency Action
The yen fell against the euro on speculation the Bank of Japan will today lower borrowing costs and say it will buy commercial paper to combat a global recession.

The yen may also weaken for a second day against the dollar on speculation Japanese officials will intervene to stem its surge to a 13-year high. The dollar declined against the euro, heading for its biggest weekly loss since the 15-nation currency’s 1999 debut, after the Federal Reserve introduced near- zero interest rates and said it would focus on buying debt, a policy known as quantitative easing.

“It’s clear the BOJ has to respond with some combination of rate cuts and additional measures to improve liquidity,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd., Japan’s largest currency broker. “The alternative of doing nothing would be taken as tacit approval of sharp yen appreciation.”
It is absolutely not clear that Japan needs to do anything here. In fact, it is absolutely clear that Japan should not do a thing. It has been proven time and time again that currency intervention does not work.

Please consider Currency Intervention And Other Conspiracies.
.... Note those numbers. Japan spent hundreds of billions in 2003 starting in August, attempting to prop up the dollar.

Japan halted its currency intervention in March of 2004 according to the International Herald Tribune article EU officials soften stance on yen's weakness.

Yen vs. Japan's Intervention 2003-2004

click on chart for sharper image

If ever there was proof of the absurdity of currency interventions there it is. Ironically the Yen started plunging shortly after Japan stopped trying to force down the value of the Yen.
Japan is prepared to embark on a fool's mission twice. Once with the Yen and a second time with their stock market. Neither can possibly work and the latter will create massive mistrust. - Mike Shedlock (Mish)

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