While you were sleeping: Japan finally intervenes

Thursday 16th September 2010

After months of speculation, the Bank of Japan has spent as much as US$20 billion to weaken the yen and to ward off the threat of slowing the country’s exports.

Estimates for the BOJ’s intervention in the currency market range from US$1.2 billion, cited by the Nikkei newspaper, to US$20 billion forecast by BNP Paribas SA. Hidetoshi Yanagihara, a senior currency trader at Mizuho Financial Group Inc in New York, estimated intervention of US$10 billion, or about 853 billion yen.

The Bank of Japan acts for the Ministry of Finance in intervention. It was the first time since 2004 that Japan has sold yen.

Finance Minister Yoshihiko Noda said Japan intervened in the currency market because of the impact of the yen’s gains on the economy. He said Japan would continue to take action, and had acted without foreign assistance.

“It is highly unlikely” the intervention will work over time, Pacific Investment Management Co’s Mohamed A El-Erian said in a radio interview.

“Bloomberg Surveillance” with Tom Keene. The intervention today was successful because it had the element of surprise, Pimco’s chief executive officer said.

As a result, the greenback posted its largest daily gain against the yen in nearly two years. By mid-morning in New York, the US currency traded at 85.63 yen.

The Dollar Index, which measures the greenback against a basket of six major currencies, rose 0.23% to 81.41.

"If you're going to trade this, I would not try to lean against the BoJ right now. This has caught a lot of investors on the back foot, and I expect the BoJ will have the upper hand for the next few days," Mike Moran, senior strategist at Standard Chartered in New York, told Reuters.

US Treasury 10-year notes declined on speculation Japan would buy shorter-term US government debt, as part of its intervention strategy to help support its economy by weakening the yen.

The yield on the 10-year note rose 5 basis points to 2.73% at 2.18pm in New York, according to BGCantor Market Data.

Meanwhile, equities on Wall Street held onto recent gains, supported by health care stocks as analysts predicted takeovers and further gains. Technology stocks gained too, after Cisco Systems Inc yesterday said it would start paying dividends next year.

In late trading, the Dow Jones Industrial Average was up 0.34% while the S&P 500 was 0.44% higher.

“The stock market is stabilising,” said Peter Sorrentino, who helps oversee $US13.3 billion at Huntington Asset Advisors in Cincinnati, told Bloomberg.

“Everybody knew the kind of slow economic growth we’d see. Companies are starting to use their cash. That bodes well for the prospects of the economy.”

Keeping a lid on Wall Street gains was a lower-than-expected reading in the Federal Reserve’s measure of New York-area manufacturing. The Fed’s general economic index fell to 4.1 this month, the lowest reading since July 2009, from 7.1 in August.

Economists had forecast the so-called Empire State Index would rise to 8. Readings greater than zero signal expansion.

A separate Fed report today showed American industrial output increased 0.2% in August, cooling from a 0.6% increase in July. Factory output rose 0.5% excluding autos, the most since May.

Economic data though has been pushed aside for the moment, as investors assess how far the BOJ is prepared to go to keep the yen in check.

Businesswire.co.nz

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