Sunset Sketches of a Little Country

Friday, September 17, 2010

Japan intervenes to Devalue Currency (sneaky-like)

Bank of Japan Keeps Yen in System After Intervention (Update2)
By Saburo Funabiki and Mayumi Otsuma

Sept. 17 (Bloomberg) -- The Bank of Japan refrained from removing funds in the financial system, leaving deposits held by institutions at the bank at the highest level this month after the nation’s first currency intervention since 2004.

Deposits climbed by 2 trillion yen ($23.4 billion) to 17.1 trillion yen, the central bank said today. Figures suggest that the government sold up to 1.8 trillion yen on Sept. 15 to weaken the yen from a 15-year high against the dollar, according to Junko Nishioka, chief at RBS Securities Japan Ltd. in Tokyo. Central banks conduct bill auctions to drain excess currency stemming from foreign purchases, a process called sterilization.

“The BOJ pretty much left the full amount of intervention in markets, a sort of effective unsterilization,” Nishioka said. “The chance for additional policy easing is increasing after the government finally intervened in the currency market.”

Japan sold yen this week after it touched 82.88 per dollar, the strongest level since May 1995. Concerns that the nation will intervene again helped weaken the yen to 85.93 yesterday, the lowest since Aug. 16. BOJ board member Tadao Noda this week said the BOJ will use intervention funds to provide liquidity.

Stronger Easing

The funds injected by Japan’s yen sales are settled today. Following the intervention, BOJ Governor Masaaki Shirakawa said the bank will continue a “strong monetary easing” by providing ample liquidity to financial markets.

Deposits at the central bank’s current account climbed to the highest since Aug. 31, from yesterday’s 15.09 trillion yen, according to the BOJ.

“While I do feel that there’s too much being made of the current-account level, it looks like the central bank’s stance is to go unsterilized,” said Takafumi Yamawaki, chief rates strategist at JPMorgan Chase & Co. in Tokyo.

The BOJ’s policy of paying 0.1 percent interest on excess reserves is setting the floor for money market rates, making it easier for the bank to provide funds without worrying about a rapid decline in the benchmark rate. The interbank overnight loan rate was traded at about 0.08 percent this morning, according to Tokyo Tanshi Co., a Japanese money market brokerage.

The previous time Japan intervened in the currency markets was March 16, 2004, when the yen was around 109 per dollar. The Bank of Japan sold 14.8 trillion yen in the first three months of 2004, after record sales of 20.4 trillion yen in 2003. Japan last bought the currency in 1998, purchasing 3.05 trillion yen as the exchange rate weakened to 147.66.

BOJ policy makers will hold regular board meetings on Oct. 4-5 and Oct. 28. The bank may consider further monetary easing measures as early as next month, said RBS’s Nishioka.
The central bank will probably consider expanding a 30 trillion yen credit program for lenders as the first choice, Nishioka said.

“But I won’t be surprised if the bank goes beyond that and move to increase monthly government bond purchases” from 1.8 trillion yen, she said.

Shirakawa yesterday said the central bank will take policy actions in a timely manner if judged necessary. He last week told parliament the bank will act should downside risks to growth materialize and the economy worsens more than the bank’s outlook. Policy makers are examining “various” policy options, he said.


To contact the reporter on this story: Saburo Funabiki in Tokyo at Mayumi Otsuma in Tokyo at Last Updated: September 17, 2010 01:08 EDT