Japan Is About to Cry “Uncle!”
Make a Killing as Japan
Intervenes in the Yen Once Again
By Sean Hyman, Editor, Currency Cross Trader
Everyone wants to stay competitive.
Target wants to keep their prices somewhat in line with Wal-Mart. Burger King wants to keep their pricing somewhat in line with McDonalds. Otherwise, they lose customers to their competitors.
The same thing happens in the currency world.
All throughout Asia, many countries do tons of business with the U.S. and Europe. These Asian exporters have to keep their pricing somewhat in-line with each other.
Otherwise, their big export customers in Europe and the U.S. will do their shopping elsewhere.
How does a whole country keep their pricing competitive? Easy. They keep their currencies valued about the same.
An Overly Strong Currency
Can Destroy an Economy
If a country doesn’t manage their currency, their major export goods will start looking “expensive” to the rest of the world. If that happens, their best export customers will look elsewhere for cheaper goods.
This wreaks havoc on export countries.
Businesses slow down. Companies lay off workers. Unemployment levels eventually rise. It also slows down that nation’s overall growth.
So there’s a lot riding on these countries to “get it right” and keep their exchanges rates somewhat in-line with one another. Otherwise, they lose business to another exporting country who managed their exchange rates more effectively.
Japan is one of the Asian exporters that occasionally loses its competitive edge in the global market.
It’s all because of the Japanese yen.
The Japanese yen is seen as a “safe haven” currency. So when stock markets drop, or disaster strikes in some part of the world, traders pile into the yen and force it to climb against the dollar. Suddenly Japan loses its competitive advantage.
To make matters worse, Japan is a big export country. Japan has big-name exporters like Toyota, Sony, and Panasonic. Each of these exporters stands to lose billions in business as the yen strengthens in value.
So it’s no surprise that these companies scream at the Bank of Japan to do something when the yen gains in value.
They demand the Bank of Japan (BOJ) “intervene” in the currency market to force the dollar to rise against the yen. They want to push the USD/JPY exchange rate up enough to get the U.S. to buy Japanese goods again.
What Intervention Looks Like
To intervene in the markets, the BOJ must sell the Japanese yen aggressively in the market to try to manipulate the yen’s price.
The Bank of Japan did this back in 2004 for instance. They were very successful in the short-term. Check out the chart below, and you’ll see what a “currency intervention” looks like.
Japan Intervened Twice in 2004!
Click here to view larger image
As USD/JPY goes lower on the chart, it means the dollar is dropping like a rock, while the yen gets even stronger.
So when the central bank intervenes, the Bank of Japan dumps Japanese yen and buys up dollars as quickly as possible. That tends to shoot the USD/JPY higher on the chart, at least in the short-term.
For example, in February 2004, the Bank of Japan intervened in the markets and pushed the dollar up 6.71% against the yen in just 12 days. That’s an unleveraged return.
However, even with a modest 100-to-1 leverage, you could have made over six times your money in the Forex market.
Even without doing the math, you can see Forex traders made a killing in 2004, simply by buying the USD/JPY. (In effect, just following the BOJ’s lead.)
For the Forex traders out there… that was a move of over 700 pips. So if you were trading five mini-lots, you would have made $3,500. Trading 10 mini-lots, you would have made $7,000.
In April of 2004, the central bank dug their heels in and really taught the USD/JPY short sellers another lesson.
They intervened in the market and forced the USD/JPY pair to climb over 1,100 pips or 11.05% in under two months. So if you had bought the pair, you would have potentially made $1,100 per mini lot traded in the Forex market.
Now the Bank of Japan doesn’t intervene in the market very often. In fact, they didn’t intervene again until September 2010. Then they did again in March of this year.
The Bank of Japan is at it Again!
Please click here to view larger image
As you can see from the chart above, the Bank of Japan has intervened twice in the past year. The Bank of Japan intervened by themselves in Sept. 2010 as they typically do.
But in March, earthquakes, tsunami and a nuclear incident made the yen stronger than ever, as traders rushed for the safe haven. That caused many G-7 central banks to join in on the party…and all intervene in the yen at the same time.
That forced a much larger leap in the USD/JPY as you can see above.
The Strong Yen is Back in
the “Intervention Zone” Yet Again
Well, that “stubborn yen” has continued to strengthen yet again. Right now, we’re right in the middle of the intervention zone (the green area), where the Bank of Japan typically intervenes in the currency.
That means it’s very possible the Bank of Japan will intervene again to push up the yen’s value. Now there’s no way to know if they will intervene tomorrow, or next month, or later this year.
But as a trader, I know those Japanese exporters must be crying uncle now. That means I’m watching and listening for any whisper of another intervention.
I know it’s coming. It’s just a matter of when.
They could intervene tomorrow, considering the USD/JPY exchange rate has hit the 78-79s (as of this writing). Or they may wait until the USD/JPY hits the 76 level like last time. Or they could even wait for a new all-time low before they act.
But honestly, I don’t care when they intervene. It’s more of a question of reacting when they do.
Once you hear about an intervention happening, there are some serious profits to be made, simply by buying the USD/JPY pair in the Forex market.
And as a long-term investor, you can short the yen in the short-term with a simple ETF. Again, it’s as easy as shorting the yen at the proper time.
Bottom line: an intervention is coming soon. When it comes, you can make a killing simply by following the Bank of Japan’s lead and shorting the yen.
Have a Nice Day!
Editor, Currency Cross Trader