Japan has been notorious for intervening in the markets to weaken the yen. They did this back in October 31 when they pushed USD/JPY as high as 79.50. Unfortunately, it appears that their efforts are short-lived, as the pair has almost returned to its pre-intervention levels.
This isn’t the first time that Japan’s currency intervention moves have failed. Last August, when Japan sold their currency to depreciate it, the yen didn’t even take a week to recover its losses.
Want another example?
Open up your charts and go back in time to March 17, 2011. You will see that USD/JPY dipped to make new lows at 76.36 and then suddenly made a huge 500-pip move due to currency intervention. Now check the current exchange rate of USD/JPY – the pair is sitting pretty at the 77.00 handle again.
Clearly, Japan’s one-day interventions DO NOT work. As such, the Ministry of Finance, the department which is in charge of Japan’s foreign exchange policy, have channeled their inner ninja and implemented what the market calls as “stealth intervention.”
Stealth intervention pertains to selling the yen in smaller but still significant volumes without necessarily informing the public.
To make sure that nothing leaks out to the public, the Ministry of Finance has chosen a set of private banks to make their currency deals instead of using popular electronic trading systems such as Electronic Brokering Services (EBS).
The purpose of the Ministry of Finance’s stealth intervention is two-fold. I will discuss each one.
First, it eases the criticism of other major economies. If you recall, many public figures in the U.S. have gone on the record to brand China as a currency manipulator because of how they keep the value of their currency artificially low.
Second, Japan knows that it cannot keep bombarding the market with massive one-time intervention bombs. These “bombs” have only lasted one day as it seems the market is eager to buy the yen again knowing that the next one won’t come for quite some time.
The Ministry of Finance hopes that impact of their new foreign exchange policy on USD/JPY will last much longer than their one-time moves.
I’m not a fan of currency intervention as it is basically a form of market manipulation but I must say that I am impressed with the Ministry of Finance. Going stealth is a good way to keep the market on its toes.
That being said, I think we’ll see a more stable yen in the coming weeks. This means that I expect a lot of non-movement on USD/JPY as traders size up the Ministry of Finance’s plan. How about you? Given the new developments, how are you going to play the yen?