Japan losing the battle

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The overnight intervention by Japan to weaken the yen is not wholly surprising given the recent moves we’ve seen on the USD/JPY.  But it’s not a situation of yen strength by any stretch of the imagination. Ahead of the currency selling by the BoJ this morning, the yen was the weakest performer on the majors so far this month. 

More the issue is dollar weakness, which the Japanese economy is not currently in a fit state to deal with.  This is the third intervention of the year to weaken the yen, but the impact on the wider view has been limited.  Japanese finance minister Azumi is talking tough, blaming speculators and adding that he would continue to intervene “until I am satisfied”.

The initial impact, coming on the last trading day of the month, has been strong, pushing the yen 4% lower vs. the dollar.  However, Japan needs much bigger guns and policy measures to weaken its currency on a sustained basis and unfortunately, it’s armoury is looking very depleted.

Guest post by FxPro

Commentary

A time for taking stock. Friday was a day of reflection upon the events of the day before and, as so often occurs, perceptions altered somewhat. Both China and the IMF seem only lukewarm to the prospect of contributing to the EFSF, while European banks were in an obscene rush to placate fears about how the new stringent 9% capital ratio might be reached, most claiming that actually they did not need to raise much new capital at all. Details of the Greek debt haircut remain scant, simply because the detailed negotiations will continue over coming weeks. Fitch said the debt-exchange plan would constitute a default, which European leaders have tried so desperately hard to avoid. Investors were unconvinced by Berlusconi’s reform pledge (who can blame them?), with Friday’s Italian bond auction poorly received. In France, Nicolas sounded almost German when he challenged fellow citizens to spend less and work harder. Clearly, he has been spending too much time with Angela recently.

Seducing China and the IMF will not be easy, or cheap. Having apparently exhausted its own financial resources, Europe’s desperate overtures to the likes of China or the IMF will not be heeded without costs. Both have both expressed only lukewarm interest thus far, keen to avoid a situation where they lose control of how the funds are spent and on what terms. For its part, China has asked for further details on the EFSF leverage plan. Before getting involved, China will likely want to see other sovereigns join in as well, and would also want pledges of security. That said China has over recent years been a keen supporter of Europe both verbally and financially, in its apparent desire to reduce its dependence on dollars. China has a strong hand to play – it certainly has the financial firepower and its economy retains considerable forward momentum. As such, China is in a wonderful position to extract concessions that may not directly pertain to rescuing Europe from the debt crisis. The IMF likewise responded coolly to Europe’s flirtations, with the likes of the US, Japan, Canada and Australia pushing back against a recent request to substantially increase their contributions to the fund. Both the IMF and China may well come to the party, but it will be on their terms and will not be cheap, either financially or politically.

Merkel the puppet-master of Europe. During the EU’s latest attempt to diffuse a crisis that threatened its existence, palpably clear is that it was Germany calling the shots. Not a surprise, it could be contended, because these days it is the Germans that have by far the healthiest balance sheet within Europe. Merkel in particular deserves an enormous amount of credit. She has delivered harsh messages to many European leaders (Greece, Italy, France, Portugal, Spain), which has inevitable triggered enormous hostility and shrill protests. Merkel has also been able to navigate through the demands of a sceptical German parliament. According to a recent poll, three-quarters of Germans do not approve of her government’s handling of the crisis. Hers has been an invidious task, requiring enormous reserves of self-control, determination, perseverance and diplomacy. She stood up to Sarkozy’s bold insistence last week that the EFSF must be allowed to borrow unlimited quantities from the ECB, and she refused to allow the EFSF to recapitalise troubled banks unless they signed up to strict conditions. Merkel drew significant concessions from Italian Prime Minister Berlusconi, and she pressured the banks to accept a greater haircut on their Greek debt holdings. In the aftermath of the summit, Merkel is gaining plaudits from politicians on both sides. The euro-project would look even shakier without her.

 

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