ANALYSIS-Japan unlikely to follow SNB in FX intervention
15 Mar 2009 17:55:04 PST
* Japan intervention unlikely, would spark big trade
* Broad yen drop also argues against intervention
TOKYO, March 13 - Based on the Swiss National
Bank's intervention to weaken its own currency, Japan may
appear to have reasons to do the same. But analysts say it is
unlikely to do so.
Intervention from the world's second-biggest economy as the
world scrambles to combat its deepest financial crisis in
decades would cause much greater trade tensions than
intervention by Switzerland, the world's 22nd biggest economy.
Earlier this decade Japan spent well over $350 billion to
push the yen lower but has resisted the temptation to intervene
so far during the crisis.
Such intervention now would hit a raw nerve, especially as
the Group of 20 nations plan in coming weeks to tackle the
global crisis that has been compared with the 1930s Great
Depression -- a crash made worse at the time by competitive
"Competitive currency devaluation is not likely in Japan
now because the risks of sparking trade friction are too
great," said Masahiro Sato, joint general manager of the
treasury division at Mizuho Trust & Banking Co.
"The Swiss can get away with this because of the relatively
small size of their economy and the limited role they play in
the global economy," he said.
Takahide Nagasaki, chief forex strategist at Daiwa
Securities SMBC, agreed:
"A simple comparison between the two countries cannot be
made, and it is difficult to say that SNB's move will open the
door for Japan to intervene," he said
The SNB announced bold steps on Thursday to fight deflation
and underpin the economy. It cut interest rates virtually to
zero, reflecting moves by the United States, Japan and Britain,
but stunned markets by intervening to weaken the Swiss franc.
That made the SNB the first major central bank in the world
to intervene in currency markets during the crisis, raising the
prospect its actions could spark a round of competitive
currency devaluations as governments move to protect their
In response to the SNB's actions, the euro posted its
biggest one-day gain against the Swiss currency and heads
turned towards Japan.
Switzerland and Japan face similar economic difficulties
that a weaker domestic currency might help offset.
Like Switzerland, Japan is facing the threat of deflation.
Both countries are seeing exports demand shrink as world trade
crumbles. In both cases, their export efforts are being
hampered by relatively strong currencies.
Indeed, Japan's exports are falling at a record pace and
the economy is already in its deepest recession since 1974.
But most importantly, Japan spent 35 trillion yen ($358
billion) in the 15 months to March 2004 to prevent a strong yen
from snuffing out an economic recovery and worsening deflation.
The historical precedent makes Japan the most obvious
candidate to follow the SNB, strategists at UBS said in a
But despite that legacy, the Ministry of Finance, which
decides on intervention, has resisted the urge to intervene so
far during the crisis, despite strong temptations.
It declined to intervene in October when the Group of Seven
industrial powers issued a rare inter-meeting statement
singling out yen volatility, giving Japanese authorities the
green light to stem its surge.
Even when the yen hit a 13 1/2-year high of 87.10 per
dollar in January and exports demand collapsed, the BOJ held
Now, the yen has fallen back and stood near 97.95 yen on
Friday, putting intervention further in doubt, analysts said.
Switzerland's surprise move came just before the financial
heads from the Group of 20 countries meet in England to prepare
for a G20 summit in April. Avoiding trade protectionism is a
main part of the agenda.
"Japan would not want to weaken the yen when the G20
countries are trying to hold protectionism at bay," Nagasaki
A significant factor behind Japan's heavy intervention in
2003 and 2004 was the state of the global economy.
At that time Japan was facing difficulties when other
economies were in a much healthier state, said Toru Umemoto,
chief FX strategist for Japan at Barclays Capital.
"Currently, almost all countries are suffering from the
financial crisis and the global recession ... If Japan
intervened in the market currently it would be severely
criticised," Umemoto said.
That seems especially true given Japan's large presence in
the global economy and role as a major exporter.
"A weaker currency is not necessarily a cure-all because it
can fuel capital flight. Japan certainly doesn't want to take
on that risk," Mizuho's Sato said.