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Tuesday, August 24, 2010 11:06 PM

Japan's Finance Minister Threatens Yen Intervention to Halt "One-Sided Movement"

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Japan's Finance minister is waving the "currency intervention flag" hoping to halt the Yen's rise. Given that markets do their best to apply pressure exactly where it is not wanted, this flag-waiving exercise practically guarantees intervention will follow.

Will it do any good? Of course not. Moreover, one has to laugh at finance minister's proclamation that the Yen's move is "one-sided". Is there any other kind of move? Generally one cannot go left and right at the same time, can they?

Please consider Noda Signals Japan’s Preparedness to Act on Currency

Japanese Finance Minister Yoshihiko Noda said he is prepared to take “appropriate action,” his strongest language to date on currencies after the yen surged to its highest level since June 1995 against the dollar.

“We have to take appropriate action when necessary, though I plan to continue to watch currency movements very closely with great interest,” Noda told reporters in Tokyo today. “My basic understanding is that movements have been one-sided.”

The Nikkei 225 Stock Average fell to a 16-month low today amid increased signs that the global economy is faltering. The slowdown in world growth has helped fuel demand for the yen as a safe refuge, driving its 10 percent advance against the dollar this year.

This week’s market volatility was also spurred by a 15- minute telephone conference between Prime Minister Naoto Kan and Bank of Japan Governor Masaaki Shirakawa, which failed to produce any concrete measures to halt the yen’s climb, according to Noriaki Matsuoka, an economist at Daiwa Asset Management Co. in Tokyo.

“At this point, the Bank of Japan no longer has the option of doing nothing at their next meeting” scheduled for Sept. 6-7, Dai-Ichi’s Shinke said. “It’s likely to announce something. The question will be whether they’ll wait until the September meeting or they’ll go ahead and call an emergency meeting.”
Verbal Interventions Not Working

Bloomberg reports Yen Drops From 15-Year High on Speculation Japan Will Intervene
The yen surged yesterday even after Prime Minister Naoto Kan told reporters “steep currency gains are undesirable” and Noda said recent foreign-exchange rate movements have “clearly” been one-sided.

“Verbal interventions aren’t working any longer,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo, which manages $119 billion. “Upward pressure on the yen won’t go away.”
“We have to take appropriate action when necessary" Noda told reporters in Tokyo today.

Appropriate Action

The appropriate action is to do nothing for the simple reason nothing makes any sense to do. Currency intervention has never worked in the past and I see no reason it would work this time.

Governments can enhance primary trends, they cannot reverse them, at least without major unwelcome consequences.

Japan’s Exports Slow Fifth Month

In other Japanese news, the New York Times reports Growth of Japan’s Exports Slows Down for Fifth Month.
Japan's export growth slowed for the fifth straight month in July, the government said Wednesday, as the global economy loses momentum and a strong yen threatens to derail the country's recovery.

The value of exports climbed 23. 5 percent from a year earlier to 5.98 trillion yen ($71 billion), the Finance Ministry said. Exports expanded 27.7 percent in June and 32.1 percent in May.

The latest figures come as the country faces the growing threat of a strong yen, which hit a new 15-year high against the dollar Monday. An appreciating yen shrinks the value of repatriated profits for exporters like Toyota Motor Corp. and Sony Corp. and makes their products less competitive overseas.

Japan's economy grew at an annualized pace of just 0.4 percent in the April-June quarter, losing its place to China as the world's No. 2 economy.
On the surface, it's pretty hard to have much sympathy for a country whose exports climbed 23.5%. However, Japan's GDP is poised to contract, so the year-over-year comparisons were exceptionally easy.

The sad state of affairs is every country wants a weak currency to fuel exports. The reality is it's mathematically impossible.

The irony is how hard it is for Japan to destroy its currency, even when that is the clearly stated goal.

Mike "Mish" Shedlock
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