Why the BOJ and SNB Interventions Will Not Work

This week we saw both the Swiss National Bank (SNB) and the Bank of Japan (BOJ)’s attempts to weaken the Swiss franc and the Japanese yen, respectively. The question is, will their strategies work this time around?

Over the past few weeks – no, months – talks of currency interventions have been popping up due to the unyielding strength of both the Swiss franc and the Japanese yen. This year alone EUR/CHF has plunged almost 1,700 pips while USD/JPY has traded as low as 76.42!

Aside from declaring the franc as “massively overvalued,” the SNB put the currency intervention issue to rest when it announced that it would be keeping the Libor rate as close to zero as possible and expand the overall money supply.

As we’ve learned from the School of Pipsology, increasing the money supply means that the central bank is trying to stimulate the economy. Though they have not actually intervened yet, the possibility of it happening in the future is pretty high if the Swiss franc continues to increase in value.

Japan‘s hand was also finally forced to act after Japanese Finance Minister Yoshihiko Noda gave an early warning to the markets. To stem the rapidly-rising yen that threatens to hurt its export industry, Japan intervened in the markets yesterday and sold the yen the first time since the G7 launched a joint currency intervention in March.

A back-to-back intervention in one week! Surely it will work this time, right? RIGHT?!

Hate to break it to you, fellas, but I don’t think the yen and franc weakness will last longer than the time it takes for Happy Pip to complete three cartwheels. For one, the BOJ and the SNB have spotty records in launching interventions.

If we take a look at USD/JPY last September when the BOJ last intervened on its own, we’ll see that USD/JPY went back down to its pre-intervention lows only 14 DAYS after the BOJ move. And to think that the BOJ had spent around 500 billion JPY for it! Yikes!

USD/JPY Daily Chart

The SNB is not exempt from the pity party. Recall that between March 2009 and June 2010 the central bank had spent around 21 billion USD in attempting curb the franc’s gains. Judging by the franc’s recent record-breaking highs against its major counterparts, I say they probably would’ve made more impact had they spent the money on other causes, like building a time machine or cloning Chuck Norris.

The second and more important reason why the impact of the interventions won’t last is the lack of good alternatives for “safe haven” assets. I mean, what’s left beyond the yen, franc, gold, and other market favorites? Will Apple products then become the next safe haven assets?

Okay maybe not, but you get my point. Eventually markets will cry uncle and realize that gold and other commodities are grossly overvalued, and attention will once again focus on currencies. Currencies of emerging markets like the BRIC countries also help provide alternatives. But remember that sentiments on the BRIC currencies are weighed down by concerns on global economic growth.

Bottom line is that until the euro zone and the U.S. economies show sustainable progress, it would be hard to successfully stem the gains of safe haven assets in the near future.


  • Marek Kaminski

    In my opinion intervention works – quite really good – look on intervention like a process. Statistics successful interventions of central banks are still higher than those unsuccessful. We should also observe the joint intervention of central banks, which almost always go. The price of yen to dolar is stable now…yen no longer strengthens.