Intervention Risks Rising

The yen is bid and the dollar has slipped to a new low for the year against it, and just slipped through the the low set late Nov near JPY80.20. Given that Japanese investors typically invest in fixed income when venturing offshore, evidence of repatriation is difficult to detect given the general rally in major bond markets. Yet the anticipation of repatriation is strong.

France, which tends to be more interventionist-minded in general, is the chair of both the G7 and the G20. French officials have reportedly called a G7 meeting of finance minister and central bankers to discuss the economic impact of Japan's crisis and "possible measures to calm financial markets".

Therein lies the risk of intervention. Recall that last September the BOJ intervened unilaterally and largely failed to stem the yen's appreciation. Since then the BOJ has made some comments that have suggested it is less concern about yen strength. However, the current crisis may change this. Last September, the rest of G7 was quite cool toward the intervention, but would likely be more supportive now.

The BOJ has aggressively injected funds into the banking system --around $700 bln--this week and more likely tomorrow. One of the reasons critics point to in order to explain the failure of intervention is that it does not often a signal a change in policy. Intervention now would reaffirm the easing of Japanese monetary policy through these liquidity injections and doubling the size of the assets being purchased under quantitative easing. Participation by other central banks may also increase the changes of success, which may not be measured so much in reversing the yen's gains as much as stabilizing it.