Notes From Underground: BOJ is emergency meeting tonight–Shirakawa leaves Jackson Hole early

The Jackson Hole Symposium is over. The talking heads attempted to spin the Bernanke speech as the mainstay of the discussion. However, we are hard pressed to find anything new in what Bernanke had to say. He basically laid to rest the idea of cutting the interest rate on bank reserves since the FED seems to be very uncertain about the effects it would have on various market participants. Also, Chairman Bernanke seemed to slay the idea that the FED will move toward an inflation target. The markets took solace in the fact that the FED will be there to support the markets if the recovery grinds to a halt, but for now the FED sees no immediate need to undergo a new more robust QE 2.

The equity markets took Bernanke’s morel casual approach to a new quantitative ease as a good sign and with the equity rally the long end of the DEBT markets sold off. The DOLLAR was mixed as it dropped against the commodity currencies but rallied versus the YEN. Again, nothing new in the Bernanke speech or the sudden about-face on the resurrection of the risk on trades.

Sunday we learned that BOJ GOVERNOR Shirakawa was called home one day early from Jackson Hole to attend an emergency meeting of the BOJ. There is a great deal of pressure coming from the KAN government to do something to halt the rise in the YEN. What has caused this sudden concern? And why? Last week, all the pundits were proclaiming that the YEN appreciation was not a grave concern for Japanese and cited the speech given by Mr. Sakakibara–in real terms, the YEN is far from overvalued because of the effects of deflation. Fifteen years of deflation, according to Mr. YEN, made the currency far more competitive than the last time when the YEN traded on the 79 handle. In a mere few days the Japanese policy makers have gone from benign neglect to apparently favoring some active attempt to push the YEN lower.

We have nothing firm to report but if the Japanese were to intervene to weaken the YEN, it would be in  their best interests to sell yen against all currencies but the U.S. DOLLAR. Most importantly, the Japanese would need to buy the EURO. Again, we stress that the EURO/YEN cross is the most important for Japanese manufacturers. For all the talk about the strong YEN not being a detriment for Japanese business during the last few months, we are left to wonder why the NIKKEI has been the worst-performing equity market in the developed world. We don’t know what action the BOJ and MOF will take but if it is massive intervention we would expect all equity markets to get a bid. As to why the sudden concern about the YEN, we believe that Japanese domestic politics are pushing the need for action.

The blog , Observing Japan, written by my son, Tobias Harris, captured the battle taking place between Prime Minister Naoto Kan and DPJ party boss, Ichiro Ozawa. Ozawa’s open challenge to Kan has pushed the issue of YEN overvaluation center stage. The BOJ may feign indifference but KAN has seemingly pushed the MOF into action. We advise our readers to be aware of any massive BOJ foreign currency purchases, for other G-8 nations may have given the Japanese the green light. With the new anger directed at Germany for its role in creating global imbalances, the Japanese may not be deemed as great a problem. We will be watching for further action.

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9 Responses to “Notes From Underground: BOJ is emergency meeting tonight–Shirakawa leaves Jackson Hole early”

  1. Gail Says:

    thanks for your good info!

  2. yra Says:

    Gail–thanks for taking the time–hope it bears fruit

  3. jill Says:

    Japanese debt service:

    1 quadrillion yen in total credit market debt

    Tax receipts: 40 trillion yen

    Expenses: 97 trillion yen.

    Every 100 basis points costs Japan 25% of revenue for debt service.

    Kyle Bass on Japan (starts at 02:20 mark)


  4. Danny Says:


    You have made a compelling point that the USD/JPY cross rate is the least important of the relative exchange rates with respect to intervention. However, as I am sure you know, Dennis Gartman has been arguing that the Swiss have tried to intervene in an effort to weaken their own currency against the Euro with no real success. In fact all they have actually done has been counterproductive. The Franc is still stronger than they would prefer relative to the Euro and they have accumulated some significant losses according to some. Do you believe the Japanese would have more success than the Swiss if they execute the intervention the same way? Are the European troubles sufficiently behind us that the Euro will not continue its decent into the deep oblivion or at the very least much lower values – as some naysayers of the Euro project have predicted? I guess I am asking, is purchasing other currencies the most effective way to devalue one’s home exchange rate?

  5. yra Says:

    That is a good question Danny.First the numbers that the Japanese can throw dwarf the Swiss numbers and the Swiss also suffers from being the geographical choice for Europeans seeking a safe haven.Yes the swiss intervention has failed –maybe.I think the swiss sold a big chunk of euros in the 130’s recently and will sop up the swiss francs on an ongoing basis.But let me raise a hypothetical question—if the PIIGS were to drop out of the EU to reset their currency values relative to a core EURO what would happen to the value of the EURO?maybe the swiss aren’t so stupid after all

  6. Danny Says:

    As I think about your question, it seems that the Euro (ex. PIIGS) would be marked higher…BUT, am I wrong to think that the total currency portfolio value would decline as the PIIGS are removed and likely undergo a significant devaluation – assuming that the Swiss aren’t able to escape their proportion of the PIIGS’ currencies without some amount of pain.

    Additionally, what must be included in the discussion around your question is, how much stress and how many failed alternatives will be undertaken before the policy makers of the EU restructure the Euro – and what is the value of the Euro at the end of that beating?

    You are very knowledgable on European politics, so what is your take on that? Even with Germany gaining significant relative political power in the EU over the past 18 months…how many serious blows do you do you think the leaders of the EU would be willing to tolerate before they finally throw in the towel and restructure the constituents of the Euro?

  7. yra Says:

    Danny–thanks for the compliment but you ask the grand question—-as my friend bernard Connolly would ask—how many transfer payments to the PIIGS will the Germans endure before the ultimate crisis occurs—-if you can get a copy of the “rotten Heart of Europe”—by Bernard Connolly.But how low can the eur/yen go before corporated Japan begins the really scream.Several stories today about large Japanese corporates warning about moving production out of Japan—-Nissan,Panasonic,Canon

  8. Danny Says:

    So there are two things that perhaps you have some insight on regarding this subject of the yen.

    1. I recall reading some stories recently that China elected to shift away from USD holdings (theoretically giving in, modestly, to the political pressure of currency manipulation rhetoric) by rolling out of USG debt and shifting into the JPY. Supposedly this has been a driving force behind what has caused the JPY to appreciate so much so quickly. If this theory were true it seems like it could raise some tensions in Asia – which I was actually hoping Tobias might comment on sometime on his blog given that I don’t know anything about Asian political relationships.

    2. I don’t disagree that a lower currency value can make a particular country’s goods more competitive in an international market place. However, I am not sure I fully buy into the notion that a moderately weaker Yen will suddenly solve all of the ill’s of Japanese industry. In fact, I wonder if the collective hedging operations previously performed by many of these same companies is actually biting them in a far more serious way than any lack of competitiveness with German goods due to currency valuation. Its almost like Japanese companies could be unwinding currency hedges almost in sync making it harder on themselves and each other. Maybe the Japanese government is trying to buy them some slack to unwind their hedges to more appropriate levels. Is there any merit to this theory?

  9. yra Says:

    I think yes –first and foremost the Japanese look out fo rthe Japanese—if you have the capability go and look at the dollar yen trade of september 23,1987–the first day of trading after the Plaza accord–very telling in the when the market opened sunday night the Yen was immediately bid to the moon—however the BOJ intervened to buy dollars so as to give Japanese investors the ability to sell dollars at a much better level–so i think your question does have merit—I have the scars of many years of YEN trading.And yes the YEN has moved higher as the chinese have diversified away from dollars pushing the yen and JGBS higher—creating potential tensions

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