Japan intervenes in currency market to cap yen gains
( 2001-09-17 15:49) (7)
Policy makers are trying desperately to avert a global recession, with Japan intervening on Monday to support the shuddering dollar as markets wait for the Federal Reserve to slash US interest rates, perhaps as soon as today.
Congress is doing its bit by passing a massive US$40 billion emergency package after last Tuesday's terror attacks, opening the flood gates for future fiscal spending not just in the United Sates but across much of the developed world.
And yet analysts and dealers alike still fear the worst when Wall Street resumes trading today after its longest shutdown since the Great Depression. Equity markets across Asia followed their European counterparts and slid afresh on Monday while the dollar came under pressure as investors sought the relatively safer havens of the Swiss franc, British pound and euro.
Japan's authorities tried to stem the rout, intervening directly to buy dollars for yen and talking up the prospects of a monetary easing from the Bank of Japan this week.
South Korea announced its own package of emergency economic measures, but that merely reinforced perceptions of how vulnerable Asia, and the world as a whole, is to a US shock.
"The scales are tilting decisively in favour of a major shortfall in world economic growth," was the reluctant conclusion of Morgan Stanley's chief economist Stephen Roach.
"Nor do we believe that likely policy stimulus will defuse the increasingly lethal cyclical dynamic that now appears to be under way," said Roach in his latest note to clients.
IT'S A SMALL WORLD
Just how small the world has become was clear on Monday when Asian sharemarkets took to their heels and Japan felt moved to buy dollars for yen in its first intervention in almost a year.
"The recent sharp appreciation of the yen in the exchange market could have undesirable implications for the recovery of Japan's economy. In this context we have taken appropriate action today in the exchange market," Finance Minister Masajuro Shiokawa said in a statement.
The action lifted the dollar to 118.10 yen after it hit seven-month lows around 116.70 early in the session.
However, since the intervention was limited to dollar/yen, the US currency remained weak elsewhere touching eight-month lows against the Swiss franc and a six-month trough on the euro.
The BOJ drove home its seriousness by announcing that the extra funds from the intervention might be left in the banking system rather than drawn out as per its usual practice.
In market parlance this is known as unsterilised intervention and is a major change of policy for the BOJ which has always argued that such action was unnecessary. It also takes them a step closer to a truly radical move such as massive purchases of foreign assets to weaken the yen.
The BOJ holds a regular policy meeting on Tuesday and Wednesday and speculation has been rife that it will further loosen its already hyper-easy monetary policy.
Analysts were now on alert for follow-up action from the US, though a Treasury spokesman had no immediate comment on the chance of intervention.
Financial futures markets are betting the Fed will move to ease policy ahead of its scheduled meeting on October 2 and many are tipping a 50 basis point cut in the 3.50 percent federal funds target as early as today.
"The fact Chairman (Alan) Greenspan chose not to do it on Friday suggests to me that he'd like to see how the market open on Monday," former Fed Vice Chairman Alan Blinder told CNBC late on Sunday.
"But we're counting days here. I think there's very little doubt that the Fed is going to cut interest rates," he concluded.
On the same show, Richard Medley, the head of influential investment firm Medley Global Advisors, agreed wholeheartedly.
"Everyone knows the Fed has to cut," he said.
"They have to cut. They'll do what they have to do and luckily we have Greenspan in charge there," said Medley.
EVERYONE'S FAVOURITE EXPORT MARKET
The strength of the yen does not bode well for Japanese exporters and contributed to a 4.1 percent drop in the benchmark Nikkei 225 share index.
The US alone accounts for around 30 percent of Japan's exports and, with domestic demand in Japan stagnant, it has come to rely greatly on such external props.
Much the same goes for Asia as a whole. Last year the US imported around US$1.2 trillion of goods from Asia and even before last week's events, the economic slowdown there had taken a heavy toll on regional economies.
South Korea for one sends 20 percent of its exports to the US and responded on Monday with plans for tax benefits and other steps to help exporters and financial markets. However, it did not stop Seoul's main share index falling 3.6 percent.
Elsewhere in the region China sends around 22 percent of its exports to the US, Indonesia 14 percent, India 20 percent, Malaysia 22 percent, the Philippines 30 percent and Thailand 22 percent.
And it does not end there. Wells Fargo Bank Chief Economist Sung Won Sohn noted the world's richest economy is a magnet for 83 percent of Canada's exports; 22 percent of Europe's; 60 percent of Latin America's; and a huge 88 percent of Mexican exports.
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