Japanese Exporters Call for 'Zero Tolerance' of Stronger Yen
Comment of the Day

September 15 2010

Commentary by David Fuller

Japanese Exporters Call for 'Zero Tolerance' of Stronger Yen

Japan's belated intervention to reverse the yen's momentum move is the financial story of the day and this report explains why they needed to do it. Here is the opening
Sept. 15 (Bloomberg) -- Japan needs to take more steps to shield exporters such as Sony Corp. and Honda Motor Co. against a strong yen after intervening in currency markets for the first time since 2004, said company officials, who welcomed the move.

The nation sold yen today to curb gains by the currency, which had risen to a 15-year high against the dollar, threatening to undermine an economic recovery. The yen tumbled the most in 19 months, helping the Nikkei 225 Stock Average gain 2.3 percent, led by transportation and technology companies.

The yen has gained as much as 10 percent against the dollar and 20 percent versus the euro this year, eroding profits at Toyota Motor Corp. and Nissan Motor Co., which are shifting some production out of Japan to stay competitive. Even after the government's move, the yen remained stronger than the estimates manufacturers have used to calculate their earnings forecasts.

"We appreciate the intervention taken by the government and the Bank of Japan," Mami Imada, a spokeswoman for Sony, said in an e-mailed statement. "Nevertheless, we expect them to continue taking appropriate measures."

Sony rose 4.1 percent to close at 2,596 yen in Tokyo trading. The maker of Bravia televisions and PlayStation 3 game consoles is basing its operating profit forecast of 180 billion yen ($2.1 billion) for the current fiscal year on an exchange rate of 90 yen against the dollar.

Japan's biggest manufacturers expect the yen to average 90.16 per dollar in the six months to March, according to the Bank of Japan's quarterly Tankan survey.

'Impossible' to Win

"It's impossible for Japan to win in global markets with the currency in the 80-yen range," Koji Miyahara, chairman of the Japan Shipowners Association, said at a briefing today in Tokyo. "Japan's new administration should show it has zero tolerance for a stronger currency and should come up with additional steps," said Miyahara, 64, who is also chairman of Nippon Yusen K.K., Japan's biggest shipping line.

The yen slid the most in 19 months after Finance Minister Yoshihiko Noda said the nation sold the currency. The step came a day after Japanese Prime Minister Naoto Kan won reelection as head of the ruling party, beating a challenger who had insisted intervention was necessary.

"The government sent an important message to the world," Toshizo Tanaka, Canon's chief financial officer, said in an e- mailed statement. "The impact on Japan's economy would have been severe if the yen were left to appreciate so abruptly."

David Fuller's view Finally! Fullermoney has often commented that governments are too often crisis oriented, and the yen's strength - shown here as a weaker US dollar against the yen (monthly, weekly & daily) was fast becoming a crisis for Japan's export-based economy. A considerable amount of nonsense has been expressed about the effectiveness of forex intervention recently, and about today's intervention, often by people who did not expect it and may have been on the wrong side of the trade.

Timely intervention works because the trend will be overstretched, central banks have the element of surprise, leveraged forex traders will be overextended and most of all, a central bank such as the BoJ can print whatever amount of paper currency it requires for the intervention.

Multilateral intervention works best because the leading central banks are involved. However, it is very rare and has only occurred to either support or occasionally topple an overextended US dollar. There will not be multilateral intervention this time because the yen is the problem and no other country wants a strong currency. Nevertheless, the USA will not oppose Japan's intervention - mainly the purchasing US dollars - because they would like to see a stronger Japanese economy.

So how will today's intervention by the BoJ play out and what are the various ramifications?

First, reports that people were buying the yen near its all-time high against the US dollar because they thought it was a 'safe haven', as often reported, are risible. The reality is that Japan's export earnings were being eviscerated by the yen's strength against most currencies, and most crucially versus the US dollar, China's renminbi and the Korean won. Forex traders were buying the yen for technical reasons because it had become a momentum trade.

Due to the Japanese government's previous dithering over intervention, the BoJ had an element of surprise in its actions, resulting in the dramatic upside key day reversal shown at the beginning of this comment. This will almost certainly result in a weekly key reversal as well. These are trend-ending signals.

Having embarked on this action the BoJ will continue, if necessary. We can be sure that chief executives of Japan's export companies, mentioned in the article above, will hold the government's collective feet to the fire, if necessary.

Momentum traders have experienced profit erosion today and will reassess. Reassessment soon leads to a reversal of positions, as we teach at The Chart Seminar. This will provide further evidence that the yen's trend has reversed. Happiness in forex is having both the trend and the central bank on your side. I would not be surprised to see USD/JPY back in the low ¥90s before yearend.

A weaker yen should steady Japan's underperforming stock market as investors anticipate better corporate profits. The proverbial Mrs Watanabe may dabble in foreign currencies once again. A weaker yen and firmer stock market should be bearish for JGBs, although I note that their futures prices rallied today.

Back to top