Japan's longstanding safe-haven status is once again coming back to bite it as the yen appreciated sharply on Monday, returning it to its strongest level against the greenback since January, and capping off a week of sharp appreciation against the greenback.
But following reports that the BoJ, Finance Ministry and others partook in an emergency meeting on Monday to discuss whether to intervene (presumably with the expectation that the yen could soon strengthen to the critical ¥100 to the dollar now that the US has officially labeled China a currency manipulator), some analysts are wondering whether Japanese officials might order a "stealth" intervention by insisting that Japan's pension funds speed up planned purchases of foreign assets, according to the FT.
One macro strategist for NatWest Markets explained how state-linked asset managers might make this happen.
Mansoor Mohi-uddin, senior macro strategist at NatWest Markets, warned investors that the GPIF and other state-linked Japanese asset managers were likely to have more influence in currency markets in coming months, particularly if the rate cuts by the US Federal Reserve put sustained upward pressure on the yen. The GPIF - the world’s largest pension fund - currently holds around 17% of its total assets in foreign bonds and 25.5 per cent in foreign equities, close to its respective targets of 15 per cent and 25 per cent.
However, its guidelines permit significant fluctuation around those targets, which allows the fund the scope to buy a further $140 billion of overseas securities, according to Mr Mohi-uddin. “In a risk case where the yen strengthens sharply and the Trump administration is adamantly opposed to the [Bank of Japan] intervening on behalf of the Ministry of Finance in the currency markets, the GPIF has the ability to ramp up its purchases of overseas securities and offset much of Japan’s annual current account surplus," he said.
International agreements give Japan the leeway to act should currency fluctuations negatively impact the economy and financial markets, though some expect Japan will wait to officially intervene until the yen hits ¥100 to the dollar.
The yen’s sudden move prompted an emergency meeting of officials from the Finance Ministry, Financial Services Agency and BoJ. After that meeting, Yoshiki Takeuchi, vice-finance minister for international affairs, said: "As we have said, it is necessary to take action based on the G7 and G20 agreement should currency moves have a negative impact on the economy and on financial markets."
Although investors largely read the remarks as a signal Japan was technically ready to intervene, most have assumed it would not do so unless the yen moved more aggressively towards the ¥100 mark against the dollar.
Despite traders’ speculation, some analysts, including Wisdom Tree Japan head Jesper Koll, believe that the GPIF is not a political creature and that its attempts to set itself up as a model of governance make the chances of it being dragged into intervention efforts "almost nil."
But if the Trump administration objects and starts making threats about labeling Tokyo a currency manipulator, the 'stealth intervention' is always an option.
"In a risk case where the yen strengthens sharply and the Trump administration is adamantly opposed to the [Bank of Japan] intervening on behalf of the Ministry of Finance in the currency markets, the GPIF has the ability to ramp up its purchases of overseas securities and offset much of Japan’s annual current account surplus," he said.
And with more market turbulence expected to spark a wave of repatriations, the ¥100 level might not be too far off.