JPY can go OTP ahead of DPJ Contest


  • scope for USD/JPY to plumb/set historic lows with the most recent being 76.37.
  • Overnight the pair reversed from a peak around 76.88 and is now at a weakly looking 76.53
  • triangle on hourly chart suggests 73.50 target!
  • More sensible targets are 76.37 and 75.46

Ahead of the Democratic Party of Japan’s leadership election on August 29, the likelihood of Bank of Japan intervention [on behalf of the Ministry of Finance] looks very limited. 

This comes after the overnight news of Finance Minister Noda setting up an emergency USD100B facility in a fresh attempt to protect the modest export-led recovery from the threat of a continued rise in the yen’s value. 

[The other overnight news, Moody’s downgrade of Japan to Aa3, has been a non-event for markets. Moody’s rating is now on a par with its rival Standard & Poor’s (AA-)]

On the face of it, Japan’s monetary authorities’ choice of this indirect option already looks ineffectual.

But even seasoned strategists in Tokyo have said this morning that the moves partly leave them scratching their heads.

The oddity of the choice of measures centres on the use of the somewhat obscure Foreign Exchange Fund Special Account (FFFSA).

The plan is that FFSA will lend funds of up to Y100bn to Japan Bank for International Cooperation (JBIC) at 6 months JPY Libor rate.

The strategists ask: 1) why the MoF decided to utilise the FFFSA in such an indirect way? 2) why theMoF aims to facilitate M&A at this stage?

They note that in the FFSA account, within Y115trn of total assets, Y3.4trn are foreign currency deposits and Y82.0trn are securities. It’s said a large part of the assets is held in USD-denominated assets, with over 90% invested in government bonds.

Therefore, rather than what we saw today, currency intervention would seem to be the most direct utilisation of the FFSA.

The strategists suggest the possibility of diplomatic considerations in order to “co-operate with other countries’ monetary policy.”

Question two is even more difficult to answer.

Obviously, following the disasters which hit the people of Japan and their economy earlier in the year, the government has instituted many measures designed to buttress the industrial sector. The overnight action seems to be within the same vein – but also looks constrained by the upcoming circumstances of the government’s inchoate status – governing party elections on Monday.

Which brings us back to our original point.

Hence for the short term, given current circumstances, there’s scope for USD/JPY to plumb/set historiclows with the most recent being 76.37.

Overnight the pair reversed from a peak around 76.88 and is now at a weakly looking 76.53.

If we take the textbook to the triangle showing in our hourly chart below, we are faced with a target of 73.50. Common sense alone suggests we need a more cautious one!

Using retracement extensions brings up medium-term targets around the new low, plus a potential newer one, 75.46.

As for the longer term, well, the scope of this post is too small to deal with the fundamental schism – cited by Moody’s in its rating cut this morning – which is stymieing Japanese politics.

Suffice to say that Naoto Kan, the seventh PM in Japan in five years, will have spent just 14 months in office before his exit and the linked article suggests that the ‘revolving door’ in Japanese government doesn’t look to be slowing down just yet. 

Therefore monetary policy and the political stability to both do intervention and to make it count, are at risk of remaining weak.


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