After G-7, Which Way for the Yen?

Many players are convinced that this evening’s conference call of G7 finance ministers and central bankers will set the stage for major selling of the yen by the Bank of Japan in order to weaken it. But the market is divided on whether other major central banks will join in with coordinated intervention.

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"There will be lots of things on the table for discussion and contingencies to prepare for," John Briggs of RBS said. "Not least is how they will ensure that technically the world’s financial system continues to operate and system clears in the event that, say, Tokyo has to be evacuated. Six of the world’s major banks are headquartered there."

But the sheer scale of the yen’s move this week will force currencies to the top of the agenda. Not least after coming into the Asian session last night the market put a rocket under the yen's value, taking it to 76. 25 yen to the dollar.

"It’s all about the general public repatriating their wealth back in to Japan," said Douglas Borthwick at Faros Trading. "Thirty percent of the all yen trading is by retail investors. They’ve been long the Australian and Kiwi dollars and sterling. But very few people have earthquake insurance. They need cash to buy food, water and to repair their homes."

Others argue the yen’s move may be indicative of market stress and players finding themselves on the wrong side of trades, so needing to tap the spot FX markets for liquidity. "During the European crisis the central banks established swap lines because people got short of dollars," said Briggs. "They may well have to do the same again here."

Briggs is in the camp that believes the best that the Bank of Japan can get from the G7 meeting is tacit permission to act alone but no more. "When the BOJ last intervened in the fall there were protests from the Europeans," Briggs noted. "As things stand it might be politically difficult for other nations to intervene now."

In contrast Borthwick is telling his clients to prepare "massive, coordinated selling of yen by the BOJ, Fed, ECB and other central banks designed to send a strong signal to the markets."

"It’s not that the Japanese Finance Minister Yoshihiko Noda is worried about Dollar/Yen," Borthwick explains. "It's about the yen relative to South Korea and China. Noda is concerned that Japan might permanently losing the production of Japanese exporters to cheaper locations if they came to the realization that there’s been a structural realignment of the Yen and it will stay permanently high."