Talk about a no-win situation: Japan’s central bank is damned if it doesn’t intervene to weaken the yen and quite possibly double-damned if it does.
The Japanese yen climbed yesterday, August 31, to 83.92 to the U.S. dollar. That’s near the 15-year high for the Japanese currency. At recent prices Japan’s exporters are getting killed. Growth in Japanese exports slowed in July for a fifth straight month. As you’d expect shares of Japanese exporters led the Nikkei 225 down again. Toyota Motor (TM), for example, fell 2.4% for the day. Canon (CAJ) dropped by 4.5%. The Nikkei declined to 8824, a 16-month low.
The Bank of Japan and the Ministry of Finance have tried talking the yen down to no avail. They’ve announced a new stimulus package and extended a cheap-loan program. And the political pressure for the bank to do more has intensified.
It’s clear what the bank could do. It could sell yen into the market. In theory that extra supply of yen would drive down the price of the Japanese currency.
But here the bank faces some disconcerting recent evidence. The Swiss central bank, seeking to stem the rise of its own currency, in April and May intervened in the markets by selling Swiss francs. Quite a lot of Swiss francs. That meant buying dollars and Euros and other sinking currencies. The total loss from that intervention, the Financial Times estimated back in June, came to 14 billion Swiss francs. And the intervention, abandoned in May, failed to do anything lasting to stem the rise in the currency. As soon as the intervention was over, the franc started to appreciate again.
And this is the best policy option open to the Bank of Japan? An intervention that fails would be the worst of all possible worlds since its failure would give traders a green light to drive the yen still higher without the fear that the Bank of Japan could intervene to turn profits into losses.
What the Swiss experience indicates is just how strong the fear-driven flight to safety in the franc and the yen is. Interventions of any reasonable dimension don’t have the power to stand against those fears. Right now it looks like the only rescue for Japan’s exporters will have to come from an improvement in the U.S. economy and a drop in global fear.
Good luck guessing how long that will take. November, anyone?