JPY: How the G20 meeting affects Japan – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, suggests that the Japan will attempt in this week’s meeting of G20 finance ministers and central bankers to preserve its freedom to intervene in forex markets to ward off a rise in the yen.

Key Quotes

“The Abe administration, facing domestic elections, wants to prevent the yen from reaching ¥100 and maintain the USD/JPY at least at current levels.

Japan’s position is clear. Japan, with the Chinese RMB in mind, has expressed support for the group’s vow to avoid competitive devaluations. At the same time, it maintains that the agreement allows short-term USD/JPY market intervention if the aim is to suppress “excess volatility and disorderly movements” in currency rates.

Any currency intervention by Japan could spark sharp criticism from China, Korea and others. If such prospects are considered strong, Japan could move to ensure that there is no direct mention of the yen at G20, while gaining the understanding solely of the US, the main object of its intervention efforts, of the need to stabilize the US/JPY.

Finance Minister Taro Aso met with US Treasury Secretary Jack Lew and voiced concern over recent one-way currency movements. He noted that no country had expressed dissatisfaction with Japanese policy, and stated that the commitment at G20 to “refrain from competitive devaluations” does not restrict monetary policy action for Japanese domestic reasons.

Aso’s remarks went against the widespread market view that Japan would be unable to intervene under current G20 constraints and thus buoyed the USD/JPY somewhat. We believe the government will do interventions to prevent further yen appreciation given the timing just before the upcoming election.

Currency interventions are unlikely to provoke a sustained rebound in the USD/JPY, but a tactical avoidance of a stronger yen will require prior discussions with the US to avoid open disapproving comments.”