There is a well-rehearsed choreography to Yen interventions. It usually starts with ‘sources close to the Ministry of Finance’ letting it be known that they are unhappy with the current level of the Yen, or at least displeased, with the sharpness of recent moves. That is sometimes enough to persuade investors to back away. If that proves insufficient, then the second step is a ‘rate check’. MoF officials call up the major trading desks and ask at what they are currently pricing the Yen vs (usually) the dollar. Of course the officials could actually discover this information via Google if they wanted to – the point though is not to discover at what level the Yen is actually trading but to let market participants know that they are close to intervening. Only if this step fails do the authorities begin actually trading.
Markets are now used to this dance; Yen interventions are far from uncommon. But last week’s episode was much more novel because, for the first time in decades, it involved the United States.
Japan’s Finance Ministry said Monday it had conducted a coordinated yen-buying operation with the U.S. Treasury on Friday, marking a rare joint move by the two allies to stem sharp swings in the Japanese currency…
The ministry also announced plans to utilize the Federal Reserve’s foreign and international monetary authorities repo facility in the future. The FIMA repo facility allows approved foreign central banks and monetary authorities to obtain short-term dollars by temporarily exchanging U.S. Treasury securities.
Two years ago, the Clark Center’s Finance Experts Panel looked at foreign operations in general and how successful they usually are following on from a previous bout of yen interventions. As this column reported at the time, the picture was reasonably mixed.
Asked whether large-scale interventions by the public authorities in currency markets can move exchange rates substantially, there was widespread agreement that they could. Weighted by confidence, 19% of respondents strongly agreed with the proposition, and another 54% agreed.
But asked whether the effectiveness of such interventions could last beyond a month, that strong consensus almost evaporated. Again weighted by confidence, a plurality of expert respondents were uncertain, 38% agreed, and 20% disagreed. Hardly a ringing endorsement of the likely success of the policy.
Of course, the involvement of the United States could – potentially – change the picture. Certainly, traders might think twice about retesting the levels that prompted intervention – at least in the very short term. There is some evidence that multilateral interventions – perhaps because of the stronger signalling – may be more durable than unilateral ones.
But whether or not the intervention succeeds in arresting the yen’s movements for more than a few weeks or not, a more interesting question to ask is: why has the US taken part at all?
Answers to that question, which has been much debated in recent days, tend to fall into two camps.
Some see this as a further example of what might be termed ‘geoeconomic policymaking’ spreading into the realm of currency management and financial policy. Japan is a US ally, and the current administration is prepared to put US financial power to work to secure that alliance and offer support. The support for the Argentinian Peso last year and talk of extending dollar swap lines to Gulf States earlier this year could be seen in the same light – as part of a programme of carrots and sticks (in the form of tariffs) to help shape geopolitics. By this reading, politics matters as much as economics.
Others, though, see less altruistic motives. Notably, the US intervention employed Euros rather than dollars. Several market observers believe that the US is supporting the value of the yen in order to relieve pressure for the Japanese authorities to sell down some of their own holdings of US Treasuries in order to intervene in FX markets.
In a perceptive FT column this week, Barry Eichengreen noted that:
The bottom line is that Washington, fearing the consequences for US financial markets, is reluctant to see foreign central banks use their dollar reserves. This is telling us that the dollar is not the attractive reserve currency it once was. When this message sinks in, other countries will redouble their search for more attractive, readily usable alternatives. Reserve diversification is apt to gather steam.
In other words, steps taken to prevent Japan from selling Treasuries in the short run could help to undermine long-term demand for Treasuries from foreign reserve managers in the longer term.
Whether the move was driven by geopolitical concerns or by financial self-interest – or, as President Trump has argued – a simple desire to help a friend- it remains unusual to see the US intervening in FX markets to support the currency of an advanced economy outside of an acute crisis. If nothing else, it will at least provide a useful case study for how effective such interventions prove to be.
