Milestones : Can Japan Kick Its Currency-market Intervention Habit?


Japans massive intervention in the foreign exchange market to keep the yen from rising too sharply against the US dollar could be about to end. No one expects the powerful Ministry of Finance to quit cold turkey, but future forays into the market could be limited to smoothing operations to counter speculative and irregular movements, in the parlance of Japanese officials. Finance minister Sadakazu Tanigaki told the Diet in mid-March,We dont plan to continue this [heavy selling of the yen] forever out of habit. But why quit now? For one thing, analysts say, the Japanese economy is finally showing some strength. If the Bank of Japan keeps flooding the market with yen by buying dollars at the command of the MOF, it will cede control over monetary policy.The day could come, analysts warn, when the BOJ loses all credibility as a central bank, not that it has to worry yet about fighting inflation.

The MOF is also responding to growing pressure from the US to stop meddling in the currency market, analysts say.The Japanese government was read the riot act after intervening on March 5 to the tune of as much as $20 billion, following the release of weak US employment data.

Ironically, if Japan does curb its yen-weakening market intervention, it could be the US that suffers the worst withdrawal pains.A significant portion of the dollars that the BOJ obtains by selling yen is invested in US treasury securities. If these flows are cut off, US yields would rise and bond prices could plummet.

With the bond market rallying on signs of persistent weakness in the US labor market, analysts are concerned about the potential of a bubble in the US debt market. If Japan pulls the plug on intervention, the bubble could burst.

Gordon Platt