The BOJ and Intervention

Last month was an economic roller coaster and the market see sawed on the news. Anyone who thought the dollar would appreciate 300 pips is a liar, but it did and the move shocked us all. While most traders where glued to the Fed and the ECB podcasts, I was analyzing the economic calendar. The BOJ confirmed my expectation with and a specific number that received little fanfare. The BOJ bought 404 billion worth of foreign bonds compared with 85.9 billion the previous month. So those tricky little guys are intervening in the foreign exchange market again. Why? We all know Japan is an export lead economy and when the Yen appreciates the big boys at Fujitsu, Toyota, and Mitsubishi start calling Governor Shirakawa complaining about profit margins and loss of market share. All those funny business terms that, crafty MBA types use to describe losing money.
Governor Shirakawa will forget those lessons he learned at the University of Chicago on letting the market decide comparative advantage. He starts depressing the Yen, by buying U.S. Treasuries, which truth be told he’s buying a time bomb to placate big business. Why because the opportunity cost of holding Uncle Sam Treasury bonds can be very high in such a volatile market. He could potentially lose billions when the dollar devalues. Another problem comes when the BOJ in a sense subsidizes the export industry they run the risk of over allocation within that particular sector of the economy. Coincidentally Japan has no need to build a War chest to defend its currency, like China or the Asian tigers. Intervention is a dirty game that Shirakawa should avoid, but we in the fx market know he will not. Look for more intervention and watch the dollar climb against the Yen. This dollar rally will not be supported by fundamentals, current account readjustments, or a rogue Fed governor. No it will be brought about by the BOJ, so buy the dollar and send a thank you card to Shirakawa & co.