Japan Intervenes, Yen Plunges; What's Next?

No major country or central bank wants a strong currency, not Japan, not the ECB, not Brazil, not Bernanke, not the Fed. The central falsehood is that every country and every central bank seems to think they can export their way out of this malaise if only their currencies would sink.

History has proven time and time again that intervention does not work, but that never stops countries from trying.

Bloomberg reports Yen Slumps After Japan Intervenes to Curb Rise; Most Asian Stocks Advance

The yen dropped the most in about five months against the dollar after Japan intervened in the foreign-exchange market to weaken its currency. Most Asian stocks rose, paced by exporters, and metals rebounded.

The yen dropped 2.3 percent to 78.84 per dollar as of 11:52 a.m. in Tokyo, set for the largest intraday decline since March 18, when the Group of Seven nations jointly sold the currency.

Finance Minister Yoshihiko Noda said Japan took unilateral action to sell the yen, which earlier this week neared a postwar record.

Yen Intraday Chart



click on chart for sharper image

A Look at Prior Interventions

Flashback December 18, 2008: Japan Announces Currency and Stock Market Intervention

It is absolutely not clear that Japan needs to do anything here. In fact, it is absolutely clear that Japan should not do a thing. It has been proven time and time again that currency intervention does not work.

Flashback March 17, 2011: Coordinated G-7 Yen Intervention in Progress; Currency Interventions Never Work

Inquiring minds are once again watching central banks intervene in the forex markets.

Japanese Finance Minister Yoshihiko Noda said Japan agreed with central banks of the United States, Britain and Canada as well as the European Central Bank to jointly intervene in the currency market, the first joint action in over a decade.

"This entire move can be pinned down to speculative positioning rather than any repatriation flows," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi.

"Since it is speculative, intervention in this case should work and clear out some of the long yen positions."

Care to change your mind Mr. Hardman?

This is what I said ...

Currency Interventions Never Work

Several people asked me to comment on this. I am not sure what I can add given my stated position that "currency interventions never work".

However, to add some color, I will say this is an act of desperation as well as a sign of hubris by central bank clowns to think they are more powerful than the markets.

Short of complete self-destruction, no one can defeat the primary trend. They can slow it down, or temporarily buy some time but not reverse it.

That said, central banks certainly can enhance the current trend. Indeed, asinine policies by the Greenspan Fed certainly made the housing bubble much larger than would have happened otherwise.

Thus, there is always a slight chance that by accident, central banks step in at precisely the right time (as a trend is about to reverse on its own accord), giving the appearance of intervention success.

Could this be one of those rare instances central bankers step in at the right time? I suppose so.

Nonetheless, as I said just yesterday in Wild Moves in Yen; Best Move for Japan is to Not Intervene; Yen Hits Record High; Carry Trade Blows Up, the best thing for central banks is to leave this alone.

Yen Weekly Chart

The chart above from today looks ominous. A weekly chart puts things in better perspective.


click on chart for sharper image

The currency intervention in March gave the appearance of working for 4 weeks or so. However, it is not clear it did anything ever. There is often a correction following a new spike high. At best, the intervention increased the strength of the correction for a few weeks.

The same applies to Greece, not with currency intervention, but interest rates. The ECB stepped in on multiple occasions to support Greece by buying Greek government bonds. The first time it worked for a couple months, the second time intervention lasted a month, and the latest effort lasted about a week.

Simple Math

Mathematically it's impossible for every currency to sink vs. each other. However they can all sink against something. That something is gold and there should be no doubt that gold is reacting to competitive currency devaluation schemes of central banks.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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