• Japan intervention may gain understanding if yen rises on factors it can’t control
• Increasing outright govt bond buying not an option for the BOJ

Former BOJ board member Mizuno says Japanese currency intervention may gain some understanding in the global community if it is aimed at curbing yen gains which are out of Tokyo’s control.

Mizuno says Japan needs to get serious about arresting the yen’s strength and should act on its warnings of intervention.

You have to hand it to Japan. For years, all their regional trading partners have manipulated their currencies to remain competitive with China while Japan has kept a hands-off policy toward the JPY. Looks like that policy may be coming to an end.

The BOJ may be forced to actively manage its currency along the lines of South Korea, Singapore, Taiwan, Malaysia, et al… That would lead to greater imbalances and a surge in the Japanese current account which will further distort US and European monetary policy as Japan looks to park the proceeds of its intervention into the capital markets of those economies.

Those global economic distortions are largely responsible for the mis-allocation of liquidity into every-riskier assets in order to try and generate meaningful returns in a low interest rate environment, setting the stage for another bubble and another crisis several hears hence.

Japanese authorities are circling the wagons, prepared to meet again, according to the Nikkei,  after their earlier action failed to have the desired results.

No big market reaction from USD/JPY or EUR/JPY as yet. They trade at 84.65 and 107.65, respectively.

Can’t any one here run a central bank?

If you want to surprise the markets and weaken your currency, do you take minor incremental steps and leak the details to the press in advance? Umm, no.

They need real unconventional policy, something like the alphabet soup of programs devised by the Fed during the teeth of the credit crisis.

Here’s a suggestion: RALF–real-assed lower funds…

If nothing else, show some confidence in your decision and immediately intervene as you announce the details of the program; don’t wait to see the reaction. Now any thing the BOJ does looks reactive and defensive.

Japan’s deputy FinMin is now on the newswires. He will be aware I presume that all talk and no action will be severely treated by the financial markets.

The Journal ups the ante, saying the anticipated emergency BOJ meeting may take places as early as tomorrow.

Some of the policy steps the BOJ could take would be to increase the amount of funds the BOJ makes available to the banks at a fixed 0.1% for three months. (The market expects at least a move to allot an additional JPY 10 trln to that facility…)  or they could lengthen the term of that facility to six months…stay tuned.

With the UK closed for a bank holiday on Monday, liquidity could be particularly thin, making very very choppy trading.

If the BOJ “only” raises its three month allotment to JPY 30 trln from the present 20 trln, look for any USD rally to be very short-lived. They need to surprise the market with something more aggressive to have a dramatic impact.

Reuters piles on the talk that there will be an emergency BOJ meeting next week when the Governor returns from the Jackson Hole conference.

Increasing the size of the supply of JPY loans to the market at 0.1%, presently capped at JPY 20 trln is the most likely route the BOJ will follow, the article says, as have many analysts this week.

In my view, the MOF will follow up with intervention. They’ve been threatening for some time and the sitting PM is on thin political ice, so they have little to lose from a political stand-point. From a market standpoint they could lose a lot if they are unsuccessful. (see the Swiss National Bank for details…).

Chicago specs are long 8 jpy contracts for every one they are short, according to the latest COT data, so I think intervention has a better than average chance of putting the fear of god into traders…

Reuters are referring to Japanese media reports that PM Kan is to be challenged by party powerbroker Ozawa.

This would seem to put in doubt any collaboration between the PM and the BoJ Governor regarding FX intervention.

The Japanese Government will call on the BoJ to ease monetary policy further as they try to offset the effects of the strong JPY (over Reuters)

USD/JPY is at its breakdown level of 84.75 and a clean break above may set off some short covering.

Some big hedge funds were buying USD/JPY quite aggressively yesterday during European trade so they may know, or at least think they know something.

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