The USD/JPY exchange rate could be expected to end the fourth quarter on a higher note than it did in the third quarter, consistent with the pattern seen in the 1996-2002 period (see charts). The exceptions to this Q3-Q4 pattern were 1998 and 2002 due to the following: Q4 1998: The 15% drop in Oct 1998 was triggered by massive selling of dollar-yen contracts by speculators unwinding their yen-carry trade positions after having initially sold yen to buy dollars and place funds in higher yielding US short-term securities. The exit (or unwinding) out of US assets was precipitated by: 1) investors worried about an incipient dollar decline eroding the value of their dollar based assets; 2) hedge funds selling their dollar assets to finance their deteriorating commitments in Asian equities and currencies. These two unusual forces exasperated the stampede, and accelerated the plunge in USDJPY, thus contributing to the pairs decline in Q4. Q4 2002: The USDJPY slide in October and part of November 2002 was the main catalyst to the pair’s negative performance in Q4 of 2002. The declines were primarily caused by markets’ dumping of the dollar amid increased certainty that the US would wage war against on Iraq, despite UN disapproval. That led to increased risk averseness, prompting risk capital to flee the US into Japan, which is distanced by geopolitical risks and enhanced by a hefty current account surplus. The fall in USD/JPY during Q4 is especially augmented by the blitz of foreign net purchases of Japanese stocks, which has entered a record 25-week run, amounting to 6.7 trillion yen ($60.4 billion) as Japanese institutions repatriate their foreign holdings in August and September for balance sheet/window-dressing purposes ahead of the end of the mid fiscal year on September 30. As institutional players begin to acquire dollar-denominated assets in the second half of the fiscal year beginning in October, USD/JPY is pushed higher into the end of the calendar year.
A Note on BoJ Intervention: Japanese authorities confirmed they intervened through the Federal Reserve Bank of NY in selling yen for dollars. The Fed’s acceptance to intervene does NOT imply the Fed is making any significant shifts in its dollar practices. The Fed only acted as an agent for the Bank of Japan, enabling it to weaken its currency and thwart excessive movements, which is permissible under the International Monetary Fund Law. Thus, it is one thing for the Fed to help out the Bank of Japan to weaken the yen against the dollar. It is another thing for the Fed to initiate the intervention effort and conduct “outright” intervention to strengthen the US dollar. REMINDER: The Fed would not want to strengthen the value of the dollar, especially when it is attempting to keep a lid on long yields. The BoJ's concerted intervention is likely to occur again especially ahead of Wednesday's (New York evening) tankan sentiment survey expected to show the best improvement in sentiment amid Japanese manufacturers in 3 years. The 10-year Treasury yield hits a 2-1/2 month low at 3.96%, falling below BELOW German 10-year yields (currently at 4.04%), which is accelerating the dollar’s decline against the European currencies. -Sep 30, 2003
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