Ministry of Finance: All Bark, No Bite?

Japanese officials always make sure that we know that they’re upset about the yen getting too strong. But do you think they’re all bark and no bite? After all, we haven’t actually seen the BOJ openly intervene in the markets since March 2011 when a massive earthquake and tsunami hit Japan.

Think again.

The Ministry of Finance (MoF) released a report which showed that the government intervened in the markets in the last quarter of 2011.

Some of you are probably scratching your heads and asking yourselves, “How the heck did I not know?” Don’t worry, I’m pretty sure you’re not the only one.

The MoF pulled off a stealth intervention which simply means that they sold the yen in smaller (but still significant) volumes without informing the public. To make sure it stays as a secret, private banks carry out the foreign exchange transactions in behalf of the MoF. Open intervention proved to be futile in the past and has earned Japan criticisms from other countries so the government opted to weaken the yen quietly.

Details of the report showed that the MoF sold 8.07 trillion JPY on October 31, 2011, the largest monthly amount spent for intervention, when USD/JPY dropped to its lowest level since World War II at 75.35. But after the pair rallied 397 pips and quickly pared part of its gains, it seemed that it still wasn’t enough. So from November 1 to 4, 2011, another 1.02 trillion JPY was again sold that consequently kept the pair trading above 78.00.

USD/JPY Hourly Chart

Why is the BOJ trying to keep the yen from soaring anyway? Ahh, that’s an excellent question, my dear reader. You see, a stronger yen would make Japan’s exports relatively more expensive as its trade partners would have to shell out more of their local currency to buy Japanese products. As the yen keeps on appreciating, Japan’s exports become even more expensive, eventually forcing its trade partners to look for cheaper alternatives. With that, demand for Japanese products would fall, putting a dent on Japan’s manufacturing industries and overall economic performance.

Now that USD/JPY is trading below 78.00, some Japanese companies are already taking a hit. Let’s take a look at a few of them.

A few days ago, Sharp, Japan’s largest manufacturer of LCD panels, announced that it is expecting to chalk up its worst annual loss ever since its inception nearly a century ago. Panasonic, Japan’s biggest appliances company, is projecting a 780 billion JPY loss.

To top that off, Honda, Japan’s third largest automobile manufacturer, estimated that it will lose 15 billion JPY for every one yen gain against the dollar. The car company also forecast that its 12-month net income will slip to its three-year low of 215 billion JPY in March.

With that, the BOJ downgraded its growth forecast from its October estimate of 2.2% to just 2% for the next 12 months starting in April. Amidst these threats to economic growth, the MoF expressed its intention to keep fighting the yen’s strength through various forms of intervention.

While their efforts, combined with improved risk appetite in the markets, seem to be doing the trick of capping the yen’s gains for now, it seems that the Japanese government’s efforts to keep the yen from appreciating are very limited. Despite that, traders remain cautious about buying the yen as the MoF could still have a bunch of new tricks up its sleeve.