Yen Intervention Losing Its Momentum as Azumi No Hildebrand

Japan's Finance Minister Jun Azumi
Jun Azumi, Japan's finance minister. Photographer: David Rochkind/Bloomberg

Foreign-exchange traders are gearing up to test Jun Azumi’s resolve to keep intervening in currency markets to weaken the yen from its postwar high.

While Japan’s Finance Minister directed the central bank on Oct. 31 to sell what analysts estimate was about 8 trillion yen ($102 billion), sending it down as much as 4.7 percent against the dollar, the move failed to increase volatility. Traders avoid currencies with increasing price swings because they boost the odds of sudden losses.

“The yen remains one of our favorite currencies as Japan still has a strong trade surplus and benefits from the global risk aversion that we’re seeing,” said Vimal Gor, the Sydney-based head of income and fixed interest at BT Investment Management Ltd., where he oversees the equivalent of $13 billion, on Nov. 3. “Unilateral interventions in the Japanese currency have no real lasting impact. If anything we’d view this as a buying opportunity.”

Azumi, who took office in September when predecessor Yoshihiko Noda became prime minister, is under pressure to weaken the yen after traders seeking a haven from turbulence in global financial markets pushed it up as much as 21 percent between April and October against a basket of nine developed-nation peers tracked by Bloomberg’s Correlation-Weighted Currency Indexes.

Shrinking Economy

The stakes are rising for Azumi, 49, as companies from Tokyo-based automaker Honda Motor Co. to consumer electronics maker Panasonic Corp. in Osaka post lower earnings because of yen gains. Japan’s economy, the third largest after the U.S. and China, will shrink 0.5 percent this year, the Organization for Economic Cooperation and Development said Oct. 31.

The Japanese government needs to take action against the strength of the yen to protect jobs, Toyota Motor Corp. President Akio Toyoda said today in Tokyo.

It will be “impossible” to reclaim domestic auto manufacturing jobs once they’re lost overseas, he said at a briefing.

Japan slipped into its third recession in a decade after a record earthquake and subsequent tsunami struck the country on March 11. Growth was further damped by energy shortages after the disaster triggered meltdowns at the Fukushima Dai-Ichi plant, causing nuclear facilities to be idled.

Azumi said last week that the government acted unilaterally against “one-sided speculative moves that don’t reflect the economic fundamentals of our economy” and that he would continue to intervene until he was “satisfied.”

‘Questioning’ Japan

“There’s a chance that, for example in my hometown, the people who are finally returning to work now that the supply chain has recovered” from the March earthquake and tsunami “will see their factories close,” Azumi said on Oct. 31. “That’s outrageous.”

Making Azumi’s job tougher is the nation’s current-account surplus, which makes the currency a haven for traders even though Japan’s interest rates are among the lowest in the world and its debt is equal to twice the size of the economy. The surplus, the broadest measure of trade, means Japan doesn’t rely on foreign capital to finance budget deficits.

Traders see little chance that Azumi will have the same success as Swiss National Bank President Philipp Hildebrand, 48, who successfully weakened the franc by pegging it eight weeks ago at 1.20 to the euro after it strengthened to 1.0075. That’s because Japan’s economy is more than 10 times bigger than Switzerland’s.

Yen Rebounds

“Market participants are questioning if Japan is able, or willing, to engage in tough intervention policy,” Greg Gibbs, a currency strategist at Royal Bank of Scotland Group Plc in Sydney, said in a Nov. 1 report to clients.

The yen weakened 3.1 percent last week to 78.24 per dollar and traded 0.3 percent stronger at 78.03 at 10:23 a.m. New York time. It rose 0.4 percent to 107.49 versus the euro after depreciating 0.6 percent last week. The Bloomberg Correlated-Weighted Index for the currency today rose 0.5 percent, halting last week’s 2.4 percent drop to 410.8175. The measure has ranged this year from a low of 371.8292 on April 11 to a high of 448.3248 on Oct. 4.

After tumbling as much as 4.7 percent to 79.53 versus the dollar on Oct. 31, the biggest intraday drop since Oct. 28, 2008, the yen halted losses the next four days as European leaders raised the prospect for the first time of the euro area splintering.

Hildebrand’s Concern

The franc fell after Hildebrand said the central bank expects the currency to weaken further. Unless the franc depreciates, “it could lead to deflationary developments and weigh heavily on the economy,” Hildebrand told NZZ am Sonntag newspaper in an interview published yesterday. “We are ready to take further measures in case economic prospects and a deflationary development should require it.”

The franc depreciated 1.5 percent to 1.2381 per euro, after touching 1.2394, the weakest level since Oct. 20. It declined 1.5 percent to 89.77 centimes versus the dollar.

Investor concern is turning to Italy as Prime Minister Silvio Berlusconi’s majority unravels before a key parliamentary vote tomorrow, with allies pressuring him to step aside after contagion from the region’s sovereign-debt crisis pushed up borrowing costs to euro-era records.

Three-month implied volatility for dollar-yen options, which indicate the expected price changes in the exchange rate, stands at 9.8 percent, lower than the 13 percent reached in August after Japan’s last intervention, according to data compiled by Bloomberg.

‘Unlimited Quantities’

The gauge is the lowest among the Group-of-10 currencies, excluding the euro-franc pair. On Sept. 5, the day before the SNB said it would buy “unlimited quantities” of currency to cap the franc at 1.20 per euro, three-month implied volatility was 20 percent. It has since fallen to 9.2 percent.

“The level of implied volatility in euro-Swiss was really high before they took the action because there was actual fear,” said Shahab Jalinoos, a senior currency strategist for UBS AG in Stamford, Connecticut said Nov. 2. “The implied volatility in dollar-yen was and is among the lowest of any pair out there, so it’s debatable that anyone was actively speculating in this pair. The level of fear is limited.”

Japanese officials fought yen gains three times under Noda, spending 7.3 trillion yen only to see it appreciate 4.4 percent against nine developed-nation currencies in the past six months, according to the Bloomberg indexes.

Japanese Intervention

The size of the latest intervention means it has a higher chance of success. Central bank deposits suggest the government sold about 8 trillion yen, exceeding the 4.51 trillion yen in August and the most ever for a one-time operation, based on Ministry of Finance data going back to 1991. Japan has $1.1 trillion in currency reserves, second in the world to China’s $3.2 trillion.

“Eight trillion yen is a very large amount,” said Daisuke Karakama, a market economist in Tokyo at Mizuho Corporate Bank Ltd. said last week. “It may have absorbed most of the demand from exporters to sell the dollar.”

There’s less risk now of the yen climbing beyond 75 per dollar in the short term, according to Noriaki Muraoka, managing director at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

Japan’s industrial output fell 4 percent in September from August, a sharper drop than analysts surveyed by Bloomberg News forecast. Export growth slowed to 2.4 percent from a year earlier in September from 2.8 percent in August, while retail sales also fell more than expected.

‘Weak Fundamentals’

“We’ll get to the phase of yen weakness at some point in the future given Japan’s weak fundamentals,” Ayako Sera, a market strategist in Tokyo at Sumitomo Trust & Banking Co., which manages the equivalent of $326 billion, said in a Nov. 4 interview.

The yen may strengthen to 77 per dollar by year-end and stay there through the first quarter of 2012, according to median estimates compiled by Bloomberg. In August, the median fourth-quarter prediction was as weak as 85. Strategists see the currency trading at 104 to the euro in December, up from a forecast of 118.5 three months ago.

Exporters say they can remain profitable as long as the yen trades at 86.30 per dollar or weaker, compared with the previous year’s breakeven point at 92.90, an annual Cabinet Office survey showed on March 11. Large manufacturers raised their forecast for the yen against the dollar during the fiscal year ending March 2012, to 81.15 from an estimate of 82.59 in June, according to the BOJ’s Tankan survey released in October.

Attractive to Traders

Honda said last week that second-quarter net income fell 56 percent from a year earlier because of the strong yen. Panasonic, the maker of Viera televisions, forecast its biggest annual loss in 10 years, in a statement released Oct. 31.

For all the weakness in the economy, the yen remains attractive to traders.

Cumulative inflows into yen-based fixed-income assets in the five days ended Nov. 4 were double the weekly average over the past year, according to data from Bank of New York Mellon Corp., the world’s largest custodial bank.

Even though bond yields in Japan are among the lowest in the world, zero inflation means investors in the nation’s benchmark 10-year notes get all of the 0.99 percent yield they offer. No other Group of Seven nation except Italy has a higher so-called real yield. In the U.S., investors are accepting a negative yield on 10-year U.S. debt of 1.81 percent after inflation.

Yen Bets

Net longs on the yen, or the difference in the number of wagers that that it will gain versus the dollar compared with those betting on a decline, fell by more than 50 percent to 25,904 on Nov. 1 from the week prior. That’s still above the weekly average since the start of the global financial crisis in mid-2007, according to data from the Commodity Futures Trading Commission in Washington.

“The BOJ has now established a track record where it intervenes for a short period of time,” Jens Nordvig, a managing director of currency research in New York at Nomura Holdings Inc. said in an interview Nov. 2. “There’s not a huge appetite for the market to go with the BOJ because it’s just temporary.”

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