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G7 acts on forex
And promise of more from BOJ
Event
A G7 meeting has produced a commitment to joint intervention to prevent
excessive yen strength. BOJ Governor Shirakawa has suggested that this
would be complemented by further monetary easing.
Coordinated intervention pushes yen weaker
After a telephone meeting of G7 finance ministry and central bank officials the
statement read “the authorities of the United States, the United Kingdom,
Canada, and the European Central Bank will join with Japan, on March 18,
2011, in concerted intervention in exchange markets”, as we argued was
likely in our note on Monday 14 March.
Intervention tends to be more effective when there is a coordinated approach.
Moreover, the effect is also more powerful when interest rates are zero, as the
excess domestic liquidity means that there are not the same issues with
sterilisation. Theoretically, Japan could buy every US$ asset in the world with
no domestic monetary consequences. Aggressive intervention from Japan in
FY03 was effective in turning the yen away from the ¥100/$ level. We will not
be able to see the scale of the intervention until early April.
The intervention in FY03 also showed that if intervention can establish
credible defence of a particular level, then asymmetric risk will push the
exchange rate in the opposite direction. This seems likely to be the beginning
of a weakening trend for the yen and, more broadly, it should reduce the risk
of financial market instability.
BOJ set to complement G7
The BOJ seems likely to hold an unscheduled meeting in order to produce a
complementary policy response. Shirakawa has said “The Bank of Japan will
pursue powerful monetary easing”. This is open to interpretation, as the BOJ
already describes current policy in these terms, and it has a history of
hyperbole in policy comments. However, during the previous period of forex
intervention the BOJ pursued a parallel expansion of its balance sheet.
A more intriguing question is whether the BOJ might take a more genuinely
radical approach. This seems unlikely to us, but there is the possibility that if
the government issues reconstruction bonds to fund a fiscal package, then
these could be bought by the BOJ. This idea has been dismissed by Economy
Minister Yosano, although he is noted for his conservative approach that does
not seem suited to the current situation. Direct purchases of government debt
issuance would probably require a change to the BOJ law and, if it happened,
it could be seen as the first step of debt monetisation.
The next step in the policy response is likely to be the outline of a government
spending package in response to the disaster. At the moment the focus is on
the emergency response to the humanitarian crisis and the nuclear leakage,
but we should soon start to see indications of a fiscal plan.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
G7 acts on forex
And promise of more from BOJ
Event
A G7 meeting has produced a commitment to joint intervention to prevent
excessive yen strength. BOJ Governor Shirakawa has suggested that this
would be complemented by further monetary easing.
Coordinated intervention pushes yen weaker
After a telephone meeting of G7 finance ministry and central bank officials the
statement read “the authorities of the United States, the United Kingdom,
Canada, and the European Central Bank will join with Japan, on March 18,
2011, in concerted intervention in exchange markets”, as we argued was
likely in our note on Monday 14 March.
Intervention tends to be more effective when there is a coordinated approach.
Moreover, the effect is also more powerful when interest rates are zero, as the
excess domestic liquidity means that there are not the same issues with
sterilisation. Theoretically, Japan could buy every US$ asset in the world with
no domestic monetary consequences. Aggressive intervention from Japan in
FY03 was effective in turning the yen away from the ¥100/$ level. We will not
be able to see the scale of the intervention until early April.
The intervention in FY03 also showed that if intervention can establish
credible defence of a particular level, then asymmetric risk will push the
exchange rate in the opposite direction. This seems likely to be the beginning
of a weakening trend for the yen and, more broadly, it should reduce the risk
of financial market instability.
BOJ set to complement G7
The BOJ seems likely to hold an unscheduled meeting in order to produce a
complementary policy response. Shirakawa has said “The Bank of Japan will
pursue powerful monetary easing”. This is open to interpretation, as the BOJ
already describes current policy in these terms, and it has a history of
hyperbole in policy comments. However, during the previous period of forex
intervention the BOJ pursued a parallel expansion of its balance sheet.
A more intriguing question is whether the BOJ might take a more genuinely
radical approach. This seems unlikely to us, but there is the possibility that if
the government issues reconstruction bonds to fund a fiscal package, then
these could be bought by the BOJ. This idea has been dismissed by Economy
Minister Yosano, although he is noted for his conservative approach that does
not seem suited to the current situation. Direct purchases of government debt
issuance would probably require a change to the BOJ law and, if it happened,
it could be seen as the first step of debt monetisation.
The next step in the policy response is likely to be the outline of a government
spending package in response to the disaster. At the moment the focus is on
the emergency response to the humanitarian crisis and the nuclear leakage,
but we should soon start to see indications of a fiscal plan.
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