Busch: Let the Currency Games Begin!

The intervention in the Japanese yen has begun and will need to continue for a prolonged period to subsidize Japanese exporters.

It is no accident that the Japanese stock marketrose last night after the actions by the Bank of Japan.

It'll be fascinating to watch the verbal gymnastics today in Congress should the intervention be brought up for discussion. How can the Japanese get a pass to intervene when the Chinese are being criticized for essentially the same activity?

A Japanese government official has said it's too early to say if the foreign exchange intervention has been successful.

I disagree.

Dollar and Yen
Dollar and Yen

It has been noted in the FX markets that Japanese exporters have already benefited from the intervention.


They have been apparently selling US dollars above 85.00 to lock in hedges for their exports to the United States. The point is that the exporters are one of the driving forces for why the yen has strengthened as they have been successful in selling their goods overseas.

This will continue and therefore their need to sell US dollars on any rally will remain. (Track US DOLLAR / JAPANESE YEN)

The other major force for a stronger yen that also won't change with intervention is globally low interest rates. Previously, rate differentials were a major reason for yen carry trades. This no longer applies as interest rates have fallen around the planet and now those differentials with Japan have narrowed dramatically.

"Given the slow growth rate, Japanese officials will likely be willing to do whatever it takes to assist their export led economy with these actions." -BMO Capital Markets, Andrew Busch

Thus, it will be difficult to tell for how long and how much the Japanese will intervene.

My guess is that they have waited this long to act to enable them to prepare for an extended period of intervention. This program could eventually resemble the Chinese model of daily smoothing operations. Given the slow growth rate, Japanese officials will likely be willing to do whatever it takes to assist their export led economy with these actions.

Japan is an export led economy.

If correct, the intervention program will balloon their US dollar reserves in the process and therefore have to buy US Treasury securities as well. For the currency, the intervention finally shows the hand of Japan and puts 82.00 Usd/Jpy as their line in the sand to be defended.

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.