G7 Statement on Coordinated FX Intervention

18 March 2011 – Statement of G7 Finance Ministers and Central Bank Governors

We, the G7 Finance Ministers and central bank governors, discussed the recent dramatic events in Japan and were briefed by our Japanese colleagues on the current situation and the economic and financial response put in place by the authorities.

We express our solidarity with the Japanese people in these difficult times, our readiness to provide any needed cooperation and our confidence in the resilience of the Japanese economy and financial sector.

In response to recent movements in the exchange rate of the yen associated with the tragic events in Japan, and at the request of the Japanese authorities, the authorities of the United States, the United Kingdom, Canada, and the European Central Bank will join with Japan, on 
18 March 2011, in concerted intervention in exchange markets. As we have long stated, excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will monitor exchange markets closely and will cooperate as appropriate.

Has Japan’s Earthquake Stopped Mrs Watanabe from Trading?

The sharp rise in the Japanese Yen has triggered a lot of talk of repatriation by Japanese investors and the price action of the Japanese Yen certainly suggests that this could be true, but has the earthquake really put investors offline? I did some research on this and here’s what I found:

1) The MoF publishes weekly data on Japanese purchases of foreign bonds and stocks. The latest data was from March 11th and it showed Japanese purchases of foreign bonds rising by Y772B. This report doesn’t accurately reflect positioning after the earthquake but next week’s report will be important because that will include the post-earthquake flows.

2) The Tokyo Financial Exchange publishes daily data on Forex Margin Contract positioning. According to the latest reports, we have not seen a major decline in short and long yen holdings since the beginning of the month. Between March 1 and March 16, total long and short USD/JPY positions declined by 3.86% while total long and short positions in AUD/JPY increased 27.87%. Here are the numbers:

3) Most of the foreign investments held by Japanese investors are in the form of Toshins (foreign currency denominated investment trusts). Their holdings are estimated to be around Y25 trillion ($300 billion). Repatriation of Toshin investments are rare but of course, these are unprecedented times for Japan. Japanese investors tend to freeze their Toshin investments first to avoid additional losses. The population in the region most affected by the quake also tend to be far more conservative investors than the rest of Japan which means that their holdings of Toshin investments are lower. Toshi investments are also usually held by high net worth individuals.

4) Finally, from my observation, Japanese traders have not slowed down at all and in fact have increased activity most likely due to the increase in market volatility.

Therefore it would be remiss to automatically assume that Mrs. Watanabe has been so shelled shocked by the earthquake and nuclear crisis that she has stopped trading or brought all of her foreign held funds back home.

USD/JPY: Top 10 Largest Moves and How the BoJ Responded

The sell-off in USD/JPY this evening is one of the top 5 largest moves ever for USD/JPY. Whenever USD/JPY experiences such sharp volatility over a short period of time, the Bank of Japan usually comes in to quell the volatility. The following table shows the Bank of Japan’s actions in response to the top 10 largest moves ever in the currency pair. As you can see, the BoJ came into the market 7 out of the last 10 times USD/JPY experienced such a strong move. The reason why they did not intervene in 1998 was because USD/JPY was trading at 121 at the time. They also did not intervene in 2008 because USD/JPY jumped 5.66 percent, which helps rather than hurts the Japanese economy. Reuters reported that G7 finance ministers will be holding conference call on Japan tomorrow. Intervention by the BoJ is very likely this evening and if that fails to do the trick, the central bank and the Ministry of Finance could make a plea for coordinated intervention when the G7 meets tomorrow.

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