Yen intervention unlikely to succeed, says El-Erian

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Mohamed El-Erian, chief executive officer of PIMCO, talks about Japan’s intervention in the foreign-exchange market to weaken the yen. He also discusses the ineffectiveness of economic policies.

Still on the same topic of the yen, the following comments come courtesy of BCA Research – Daily Insights:

“The Japanese yen fell earlier this week as the Bank of Japan (BoJ) intervened in the foreign exchange market to sell the currency for the first time since 2004. Prior to the intervention, the yen was perched at a 15 year high against the U.S. dollar. While there is speculation that the monetary authorities will leave the intervention unsterilized, the size of the action is unlikely to change the underlying upward trend in the yen. Indeed, our Foreign Exchange Strategy service cautioned a few weeks ago that [in the event of intervention] “USD/JPY will almost certainly spike higher. However, for currency intervention to have a long run impact, it must occur with a change in monetary policy.

“In any case, there is little chance that the BoJ will ramp up its quantitative easing measures sufficiently to make a difference. The Fed is purportedly considering the purchase of an additional $1 trillion of assets, or about 7% of U.S. nominal GDP. An equivalent amount relative to the size of the Japanese economy is ¥33 trillion. In our opinion, it is very unlikely that the BoJ will pursue such a bold policy.

“Furthermore, comments by a top Japanese government official following the intervention will likely invite further speculation on the yen: Chief Cabinet Secretary Yoshito Sengoku was quoted as saying that the Ministry of Finance (MoF) “seems to think” 82 yen per dollar needs to be defended. By drawing a ‘line in the sand’ the MoF is only persuading currency traders to test the BoJ’s resolve. The bottom line is that investors should continue to hold strategic long positions in the yen versus the dollar.”

Sources: Bloomberg (via Clip Syndicate) and BCA Research – Daily Insights, September 16, 2010.

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