Credit: Marshall Gittler, Head of Investment research, FXPRIMUS.com
Japanese officials have been warning that they stand to intervene to fight what they call “excessive volatility” in yen moves “If such moves occur, Japan is ready to intervene in the market,” according to Finance Minister Taro Aso. PM Abe agreed and said, “We’ve seen some rapid and speculative moves in currency markets recently ... We will watch currency moves carefully and take action as needed.”
Japanese officials justify their threats by saying that the G20 agrees that currencies should reflect fundamentals and that volatile moves are to be avoided.
What exactly did the G20 say? At the last meeting of G20 Finance Ministers and Central Bank Governors, the communique said as follows:
We reiterate that excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will consult closely on exchange markets. We reaffirm our previous exchange rate commitments, including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes.
So yes, it does say that excess volatility is bad. But is the yen excessively volatile?
Although the currency has moved a lot in the last few days, the fact is that over the last month or so the volatility has been nothing unusual. The euro and sterling have been almost as volatile and you don’t hear anything about possible intervention in those currencies.
Secondly, although the G20 statement this time didn’t mention anything about exchange rates reflecting fundamentals, that’s been a consistent theme in these communiques over the years and one that’s often quoted by the Japanese authorities. So we have to ask: even if the yen’s rise was rapid, as PM Abe said, was it a “speculative” move or does it reflect fundamentals?
The fact is, looking at real interest rate differentials, the yen could indeed be even stronger.
And if we look at Purchasing Power Parity, the yen is also undervalued. On one measure – using producer prices – it’s the most undervalued currency in the G10.
So even if the yen’s moves were rapid, they weren’t necessarily speculative. The currency’s strengthening reflects fundamentals
In fact, the yen’s supposed “strength” is nothing but an optical illusion caused by looking at the nominal value of one currency pair – USD/JPY – without taking into account either a) the yen’s movements against other currencies, or b) the inflation differentials between Japan and its major trading partners. A measure that does compensate for those problems is called the real effective exchange rate. And if we look at that measure of the yen, then we can see that even though the currency has indeed strengthened, it’s still well below its long-term average. And with a current account surplus forecast to be some 3.6% of GDP this year, we can hardly say that Japan is likely to suffer.
In short, the Japanese authorities really don’t have anything to complain about. But you try telling them that. (I once did and the answer I got was, “Well, Mr. Gittler. When people in Japan start thinking like that, we’ll follow your advice.”) The fact is, there’s an Upper House election coming up in July and they have to be seen to be taking care of their constituents. So even if economic theory would suggest that they should leave the FX market alone, politics trumps economics every time. Watch out if USD/JPY moves any lower.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
