Intervention: The genie has escaped from the bottle

The spectre of intervention is hanging over the world’s currency markets after Japan ended weeks of speculation and stepped to stem yen strength for the first time since 2004.

The yen tumbled more than 3 per cent against the dollar on September 15 after hitting a high of Y82.88 as Japan’s Ministry of Finance confirmed that it had intervened in the market, saying the yen’s gains were “a problem that could not be overlooked”.

Traders estimated that the Bank of Japan sold about Y2,000bn ($24bn) in an effort to rein in gains in its currency, which has been boosted by haven demand amid worries over the health of the global economy. Tokyo said it tried and failed to get the US and the eurozone on its side so was forced to intervene unilaterally.

Geoffrey Yu, currency strategist at UBS, says many central bankers across the globe must now be thinking that if Japan can do it without the US commenting, why should their economies bear the brunt of global rebalancing?

“We have argued that increased intervention will be one of the major trends over the coming decade, given increased currency volatility since 2007,” says Mr Yu.

“As Japan moves to stem yen gains, the beggar-thy-neighbour policies which many have feared since the great recession began are a step closer to the norm.”

Signs of concern over bearing the brunt of dollar weakness have not been confined to Japan, as speculation mounts that the US Federal Reserve will announce an extension to its quantitative easing programme – an event that is likely to trigger further losses in the US currency.

Officials in Singapore, Brazil, New Zealand, Taiwan and Colombia have all warned about the strength of their currencies in recent weeks.

Meanwhile China still manages the level of the renminbi despite criticism from the US and the eurozone that it is keeping its currency at artificially low levels, while other Asian central banks have been suspected of intervening in the market to stem gains in their currencies.

But the move from Tokyo has attracted particular attention as, apart from the Swiss National Bank, which intervened to stem appreciation as part of its quantitative easing programme from March 2009 to June 2010, it is the only leading central bank to target the exchange rate explicitly in the wake of the financial crisis.

Steve Barrow, strategist at Standard Bank, warns of tensions between members of the Group of Seven industrialised nations. “Japan has probably stirred a bit of a hornets’ nest with go-it-alone intervention,” he says.

Jean-Claude Juncker, head of the 16-member eurozone finance ministers group, expressed displeasure about Japan's decision, saying: “Unilateral actions are not an appropriate way to deal with global imbalances.”

Mr Barrow says Mr Juncker wants a fight against the common enemy: China. Tim Geithner, US Treasury secretary, also wanted to avoid currency intervention to persuade China that floating currencies are the best option.

“This message has rather been undermined by Japan’s intervention,” says Mr Barrow.

“But the irony is that if G7 policymakers raise currency tensions too much with Asia, the yen could come under even greater pressure to appreciate.”

Philip Poole, global head of macro and investment strategy at HSBC, says the Bank of Japan is trying to break an appreciation trend in the yen that was threatening to push it to an all-time high of about Y80 to the dollar. But he doubts whether unilateral intervention can be successful. He says investors’ appetite for risk is likely to shape the path of the yen. In an environment of global risk aversion, Japanese investors tend to sell higher-yielding foreign financial assets and remit the funds back to Japan and so into the yen.

The unwinding of such carry trades has been a factor behind the recent strength of the yen, with momentum investors exacerbating those trends. When risk appetite increases, the opposite should happen, with investors selling the yen and buying higher-yielding currencies.

“While the BoJ’s intervention has hurt momentum investors that had positioned for yen strength, much of the answer regarding the ultimate success or failure of this policy is likely to relate to whether risk appetite improves,” says Mr Poole.

“If it does, it should help take the upward pressure off the yen.”