Market Pulse: April 15, 2024

We are closely monitoring developments and will take all necessary steps," Suzuki told reporters at the Finance Ministry.

Minister Suzuki was talking about Japan’s currency. The Yen is weak and getting weaker. The Yen per Dollar has risen to 154.00, a level not seen in three and a half decades and Suzuki was not happy with the level or the pace. So, in accordance with an established tradition for those in his position, it was time threaten currency intervention.

This is not a new development for the Yen, it has been consistently losing value for three years. But official Japan gets nervous for their currency at or around this FX rate. In the last couple of years, the Dollar/Yen teased with a rate of 150.00, but the Ministry of Finance was proactive. In 2022 they intervened, buying about $60 billion worth of their own currency to bend the trend. Last year, when the level was again tested, phone calls were made, with the underlying messaged being that the authorities were more than willing to once again buy Yen and squeeze the shorts out of the market.

Suzuki’s comments imply nothing less, but history suggests the success is hardly a lock.

Over the last four decades the story of the Yen is incomplete without telling the story of FX market intervention; both solo and as part of a determined crowd.

When President Nixon closed the book on the Bretton Woods currency regime in August 1971, it took 350 Yen to make a buck. Throughout most of the seventies the dollar collapsed. By the time Volcker took over the Fed in 1978, and then became the hard money guy we all remember, the Dollar/Yen was as low as 177.

The dollar rallied from that point, but over a period of several years, it went too far against all major currencies, including the Yen. US exports became prohibitively expensive and the trade gap grew. The solution to the strong dollar was concerted/joint intervention as prescribed by the Plaza Accord of September 1985. The G5 nations (France, Germany, Japan, the UK and the US) agreed to sell the dollar and buy D-Marks, Yen, Francs and Pounds, in amounts that would frighten away any dollar bulls.

The Plaza Accord worked, but it worked too well. The dollar’s value fell to new lows, then it fell further. US exporters enjoyed the ride, but by early 1987 the other members of G5…G7 were less than happy with the ongoing dollar weakness. But the dollar decline continued against its main trading partners until the mid-nineties.

It was during this final phase of the move that the Yen becomes the most prominent player in the currency drama. It was at this time that the FX situation was more about Yen strength than it was dollar weakness. Japan’s disinflationary/deflationary trends were pushing up its currency.

The Yen strength versus the buck during this period, was against the backdrop of aggressive Bank of Japan easing; they took the target rate from 6% down to 1%, from the beginning of the decade until April 1995. However, as the BoJ was cutting rates the Fed raised the level of the Fed Funds, hiking the rate from 3% to 6% as of March 1995. Even as the policy paths diverged, BoJ slashing its rate while the Fed doubled its rate, the Yen soared, moving from 159.00 early in the decade to 79.75 in April 1995. This is not what the brochure said was supposed to happen…higher rates/stronger currency and vice versa, right? Not this time!!

Japanese stock markets peaked in 1989 and fell by more than half in the next five years. Property markets were even worse. Japan’s GDP was over 7% in the early 1990s, it was negative about half the time from the middle of the 1990s to the end of the decade. Japan’s Consumer Price Index, ex-fresh food, was over three percent early in the decade and by the beginning of 1995 it was below zero for the fist time in the post war period. Additionally, another factor in pushing the Yen higher, was the Kobe earthquake of January 1995.

The last thing Japan needed was a strong currency, which was a gale force headwind for all the factors I just cited. So Japan argued/cajoled/pleaded for a break on the relentless Yen rally, which by that time was a quarter century old. The G7 agreed to intervene, and, for the first time, this group would be selling yen in particular and also buying the dollar in general.

Once again, it was the case that a united effort by the world’s largest economies bent the FX market to their will. This time there was a unique side effect, the Yen Carry Trade was born from the decisions of April 1995.

The calculation is:

• The Yen was strong, but there was an international effort to weaken it.

• The Bank of Japan target rate was extremely low; it was 1% April 1995 and zero by the end of the decade.

As far as I know the first mention of the Yen Carry Trade in the press was in January 1996, when the Wall Street Journal explained the strategy that was being utilized by George Soros and The Tiger Fund, among others. The “so called Yen carry trade” was when an investor borrowed in a low rate currency, invested those funds in a higher yielding currency and let the trade run. When the time came, the investment would get liquidated and then the funding currency needed to be repurchased in order to complete the transaction.

The post April 1995 Yen was perfect. Rates were zero or close, the currency was weakening, with a lot of firepower to make sure it would continute to do so. It can be said that participation in the carry trade was one of the factors behind the consistent weakening of the Yen during that time.

The first vintage of the carry trade came to an end when genius failed in the fall of 1998 and the LTCM hedge fund nearly took down the Treasury market. Carry trade positions were liquidated en-masse in early October 1998 and the Dollar/Yen fell from 136.00 to about 110.00 in just a few trading days.

There was a relatively short lived period of concerted G7 intervention in the Yen following the Fukushima earthquake in 2011. And there were a couple of other occasions when the Bank of Japan was able to get some assistance from the Fed and or ECB when they entered the FX market, to keep its currency from getting too strong. But the half dozen or so currency interventions to weaken the Yen by Japan after 1998 until 2011 were solo ventures and for the most part any success was usually short term.

Proof of that is that the all-time low for Dollar/Yen, 75.57, was not set until late 2011, despite years of Japanese solo interventions.

Shinzo Abe became Japan’s Prime Minister for a second time in December 2012. His radical economic plan, known as Abenomics was very important for reducing the value of the Yen.

Abenomics would increase money supply, use government stimulus to get the economy moving and reform/ease regulations to create more business opportunities. Dollar/Yen went from sub-80.00 to 125.00 in a little over two years; more effective in weakening the currency than any solo intervention had ever been.

In the last couple of years Japan has entered, or threatened to enter, the FX market to strengthen the Yen not weaken it as was always the case before now. Seeing as how the Dollar/Yen is trading over 154.00, a level of weakness unseen since 1990, it can easily be said the recent interventions have not been a success, as history suggests would have been the case.

One factor to keep in mind is that the carry trade was key in weakening the Yen during the late 1990s and that might be a factor in the FX market today as well.