Tuesday, 2 December 2008

Interesting article on intervention in the Yen

TOKYO, Dec 2 (Reuters) - Nearly half of major Japanese firms want authorities to intervene to prevent the yen from rising beyond 90 yen to the dollar, to support Japan's export-driven economy, a Reuters survey showed.

The yen hit a 13-year high of 90.87 yen to the dollar in October, and traders say it may climb past such a level in coming months, as investors continue to shun risky carry trades due to credit market turmoil and fears of a global recession.

"A recovery of the export industry's earnings is important for the Japanese economy at this stage," said a company in the services sector.

Japan slid into its first recession in seven years in the third quarter as exports crumbled.

Exporters have been the main engine of growth for Japan's economy, but data released last week showed that manufacturers have forecast their biggest ever quarterly fall in output in the fourth quarter, fuelling worries of a deep recession.

The yen's historic jump in October was partly due to the unwinding of carry trades, in which investors sell low-yielding currencies like the yen to fund investment in higher-yielding currencies and assets.

Asked whether they wanted currency intervention to prevent the dollar from falling below 90 yen, 97 out of 213 major firms that responded, or 46 percent, said they hoped for such action from Japanese authorities.

Sixteen percent, or 34 respondents, said they did not want intervention while 39 percent, or 82 respondents, said they did not have a preferance.

In a separate query on the chances of yen-selling action by Japanese authorities, 65 percent of respondents said they thought Japan would intervene if the dollar fell to 90 yen or below, while 35 percent said they were not expecting any intervention.

Among companies that expect such intervention, 44 percent said they thought there would be intervention if the dollar falls below 90 yen, 29 percent said a dollar slide below 87.50 yen would trigger such action, and the remaining 27 percent thought Japan would wait until the dollar falls below 85 yen.

Some respondents said currency moves should generally be left to market forces, but added that intervention may be needed to curb sharp fluctuations.

"Trying to avert sharp swings may be necessary, but it would be better to avoid intervention if possible," said a company in the oil, coal and ceramics industry.

Others were sceptical that solo intervention by Japanese authorities would be effective, and some questioned whether foreign exchange intervention was the right response to the turmoil in markets and the global economy.

But a transportation machinery maker, which said it wanted authorities to intervene to prevent the dollar from falling below 90 yen, added that the biggest worry was how long the adverse economic conditions stemming from the financial crisis would last.

"Once we escape this situation, foreign exchange conditions are likely to return to natural levels. In other words, the concern here is the time required to shake free from this situation, and this is not an issue that can be resolved through foreign exchange intervention," the company said.

Japan has stayed out the market for more than four years, the longest such stretch in Ministry of Finance data going back to 1991.

Japan sold 35 trillion yen in the 15 months to March 2004 on concerns that excessive yen strength could dampen overseas demand for Japanese exports and hurt the economy.

As I have said before, below 90.00 and the BOJ will act. KT

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