Move To Stem Yen's Surge Likely
The seemingly unstoppable rise of the Japanese yen is raising the prospect that, for the first time in years, the Japanese government could intervene to stifle its surge.
Finance chiefs of seven leading industrialized nations, known as the G-7, which includes Japan, appeared to endorse such a move in a rare statement. The statement said 'excessive volatility' in the yen threatens economic and financial stability.
But members of the G-7 seemed to shy away from a coordinated initiative, with France's finance minister saying a potential intervention would be 'purely Japanese.'
Japan's government faces a major challenge: The unwinding of one of the most popular trades is sending tremors through the global financial system and supercharging the yen, which harms Japanese exports. Friday, the yen vaulted to a 13-year high against the U.S. dollar.
Late Monday in New York, one dollar bought 93.58 yen, down from 94.60 yen Friday, and down 12% this month.
The yen, like the dollar, has benefited as a safe-haven play as investors retreat from all manner of assets, particularly in developing countries. A major factor in the yen's rise is that investors are undoing a perennially popular practice in currency markets, which involves taking advantage of Japan's rock-bottom interest rates to borrow money and invest it in higher-yielding assets elsewhere.
This practice, dubbed the carry trade, can be found in various permutations around the world, anywhere investors attempt to take advantage of cross-border differences in interest rates. It can deliver steady profits over the long term, so long as the currencies involved remain relatively stable.
But volatility has risen, and investors are getting nervous, so they are unwinding these trades. To do so, they are buying back yen, the currency in which they borrowed. This has helped produce sharp surges in the yen.
'There are many, many, many different people in this trade,' said John Taylor, head of FX Concepts, a currency-focused hedge fund in New York. 'It has always been that you make money and then you run like hell and try to get out of the way.'
Participants from hedge funds to corporations to individuals have employed carry-trade maneuvers, which are notoriously difficult to measure. That also complicates any potential intervention by the Japanese government: No one knows how much unwinding remains, and Japan could find itself fighting still-powerful deleveraging by investors. The government would be selling yen, to lower the currency's value, at the same time investors were buying it to close out yen-denominated loans.
Still, some traders cautioned against discounting intervention by governments. Australia has joined the fight, confirming it bought Australian dollars Friday and Monday in a bid to stabilize the currency.
'The central banks have spoken, and it's time to listen,' wrote Brent Donnelly, a currency trader at Barclays Capital in New York in a note to clients Monday, urging that they consider buying Australian dollars and selling yen.
Japan last intervened in the currency markets in late 2003 and early 2004, when it sold massive amounts of yen, which ultimately succeeded at weakening the currency.
Individual traders are playing a key role in the current carry-trade shakeout. In Japan, retail currency trading by individuals, often using hefty leverage, has boomed in recent years as an alternative to online stock trading. |
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