Wednesday, September 15, 2010

Help Jake Understand: Yen Intervention Edition

The WSJ details:

The yen plummeted against the dollar Wednesday after Japan intervened in currency markets for the first time in more than six years.

The dollar gained more than 3% against the Japanese currency after having dropped Tuesday to its lowest level in 15 years vs. the yen. Japan's Ministry of Finance said it would intervene again Thursday in currency markets if necessary.

Concerns over the pace of the U.S. recovery have recently sent investors flocking to the perceived safety of the yen, especially as investors speculate whether the Federal Reserve could implement another round of asset purchases to kick-start a moribund economy, which would likely weigh further on the dollar.

First of all... I am many things and a currency expert is not one of them...

With that said... I completely understand why Japan is intervening in the currency markets for economic purposes (a strong yen is hurting exports), BUT isn't the ability to literally print an overvalued piece of paper the ultimate prize?

For years, counter-fitters have printed worthless paper in the hopes of using it to buy things of value, but with Japan they can do this legally! Why not open up the printing presses and use that new currency to buy goods of value from abroad (I'm not talking other currencies, I'm talking REAL assets)?

To me this will result in at least one of the following (though, I'm sure there are 1000 more):
  • A weaker Yen (i.e. the goal)
  • Inflation (i.e. the best thing that could happen to Japan so that monetary policy would actually work)
  • Nothing to the Yen or to inflation, which means you got a bunch of real assets... for free.

What am I missing?

Source: Yahoo Finance


  1. Amusing idea!

    I suspect it is politically impossible. I don't know the rules in Japan. But imagine Bernanke trying to dress up such an action to fit within his allowed purpose. No way.

  2. Best way to frame this question ever! I will be interested in seeing the replies, this issue is near and dear to my heart and have written on it (not in this particular frame of reference) for years. Cuts to the core of the operating system.

  3. apparently RSS feeds cut off for the blog... right when i need some intervention help...

  4. You need a "contact me" button.

    I posted a couple comments and a question on the retail sales post I hope you catch.


  5. Mish- post updated / 'contact me' added

  6. Of course, if you print too many yen and generate too much inflation (or too much valuation), then JGB buyers may get skittish... In which case the central bank will have to print even more yen to buy JGBs... in which case buyers will get even more skittish... which means more monetization of JGBs... etc etc etc.

    Japan is a bug in search of a windshield.

  7. scrilla- isn't that the goal? for yen buyers to become skittish?

  8. Hi Jake. I'm surprised you didn't get deeper answers on this one.

    As you surely know, currencies of major countries today are fiat currencies with insignificant inherent value. The exchange value today is determined solely on the supply and demand of the currencies by the central banks (and perhaps some large institutions).

    The value of a nation's real assets can be controversial, and was one motivation for the fiat floating currencies.

    Thus when the Japanese are motivated to influence the value of the yen, they can print and inflate, but they motivated to buy/sell in the FX markets instead of buying real assets.

  9. anon- having issues with my RSS feed (i.e. this post didn't show up - hence 2000+ people didn't see it).

    thanks for the response. my counter argument would be that purchasing real assets increases the supply of yen as much as buying currencies. it just takes one more step, but the seller of the assets has a new supply of yen that they will want to do something with. perhaps buy non-yen currencies.

  10. Your points are right on, but currency targets are not wholly economic phenomenons. Politics and international relations is as important. Japan may have restrained from earlier currency intervention due to such considerations. However, the Japanese savings rate is much lower now and income disparity is a key issue. These and control by a new political party may have prompted renewed consideration of past agreements with other countries. It is worthwhile to keep in mind that the relative magnitude of JPY/USD moves in the past 3 years is almost as drastic as after the Plaza Accord.

  11. Jake
    why do you think they (the Japanese Ministry of Finance or the Japanese Central Bank) are printing money in this "intervention"?
    The currency intervention in this case will involve buying USD in the open market in exchange for yen that may have already been "printed" before...
    My point is that the JPY sold by either the CB or the MoF was already printed, already in their possession.

  12. according to reuters they are printing... is this wrong?

  13. Whether the intervention works or not in achieving it's presumed goal of a stronger USD/YEN ratio, I don't really know, but I suspect it will fail in stemming Yen strength as these moves have in the past failed with so many currencies.
    But Felix Salmon, I don't know why he is saying Japan (meaning BoJ) is "printing".
    Whether the yen released out of the BoJ is sterilized or unsterilized is besides the point. Presumably Dollars have been taken out of the market to affect the USD/YEN pair and that will have balance sheet implications for the Japanese central bank.
    I've made it a point to make sure I understand what people mean by money printing. Where does it say BoJ originated more YEN? For all I know, they have an existing pool of Yen they sold to suck out Dollars from the Japanese economy.
    If that's 20 billion dollars worth, yes that's a drop in the ocean as far as FX markets are concerned. Hence, the move is probably symbolic at best and will likely prove to be a correction of the primary USD/YEN trend.
    But where is the evidence of printing?

  14. it looks like you are correct that they are not printing (, but that really has nothing to do with my post.

    in my post i ask... why don't they print and use that money to buy real assets if they want the value to fall?

  15. Japanese would have to buy up so-called REAL assets using a currency that's quickly being devalued by this hypothetical scenario of money printing.
    i.e. Yen going down in value due to printing; assets denominated in any currency including yen go sharply up in value.
    So that's one problem with what you write.
    Nothing can be bought "for free".

  16. Again... A devalued currency is what they want! When the result of doing something = the result, then it is a free option!