USD/JPY has been flirting with the 80.00 handle for almost a month now, but unlike in March, the BOJ and the newswires haven’t been abuzz with rumors of a market intervention. What gives?
A whole different story
If you’ve been shorting the yen purely in hopes of the BOJ stepping in as it did back in March, you may want to reconsider your strategy. It’s an entirely different story this time around, and I think it’s unlikely the BOJ will intervene to curb the yen’s rise.
First of all, the yen rally then was incredibly strong and happened ridiculously fast. Coming off the magnitude 8.9 earthquake, USD/JPY tumbled 688 pips within the span of just five days.
The sharp drop was a result of heavy speculative trading in anticipation of repatriation flows, or the return of Japanese capital to Japan to help in the rebuilding process. Basically, since traders believed that Japanese companies would be buying boatloads of yen to bring back home, they bought yen by the truckloads themselves!
There was just so much panic and uncertainty involved back then and the rise was so quick that it threatened not just Japan’s exporters, but worldwide market stability! And that’s exactly why the BOJ’s intervention was supported by other central banks.
Now, if you compare that to the 500-plus pips that USD/JPY dropped in the past two months, you’ll see why the BOJ isn’t as anxious this time around. The yen’s recent climb has been much slower and steadier, and therefore, less alarming.
Like trying to swim upstream
More importantly, there seems to be a sense of resignation about the yen’s rise. The BOJ itself knows that now isn’t the best time to intervene. Selling the yen now in hopes of weakening it would be like trying to swim upstream… and the BOJ is no salmon. It knows better than to waste money on an ineffective intervention.
As long as risk aversion is in play, the yen stands to rise. The euro zone’s never-ending debt issues have come to light again, and this has caused traders to seek refuge in safe haven currencies such as the yen.
Furthermore, the U.S. is facing economic problems as well. Just this week, the Fed downgraded its growth forecasts and revealed that more stimulus may be taken if its recovery doesn’t improve. Of course, all of this makes the yen more attractive and all the more likely to continue climbing even though Japan has economic problems of its own to deal with.
Now, this isn’t to say that the central bank won’t throw a few rocks at the yen to try to slow it down. Japanese officials may very well engage in a bit of jawboning. After all, words are cheap and easy to come by. But I wouldn’t count on the BOJ to throw money away on an actual intervention anytime soon.