BOJ timing is interesting

The Bank of Japan’s overnight intervention in the currency markets is big news, but as people dig into the timing and other details, it gets even more interesting.

The Japanese sold about 1 trillion yen ($12 billion) last night at a loss, effectively eroding their own currency’s exchange rates. It was a unilateral move without European Central Bank or U.S. Treasury support.

The intervention — the country’s first since 2004 — was aimed at breaking the recent strength of the yen, which has soared to multi-year highs in recent weeks and raised doubts about the future of Japanese exporters.

Although there has been a lot of buzz about intervention, few in the markets were seriously expecting this during the fight for control of the ruling Democratic Party. Current PM Naoto Kan has established himself as a deficit hawk while loser Ichiro Ozawa was the real advocate for yen intervention.

The fact that Ozawa lost the battle for party leadership but appears to have won this policy matter is a surprise for Tokyo watchers.

Now that the BOJ has moved back into the markets, the question is how much they can do here.

Currently, the Ministry of Finance is limited to 145 trillion yen of currency and bills, with around 110 trillion yen out there already. That leaves 35 trillion yen ($410 billion) to work with — and the government can always raise the limit as needed.

Not a good time to bet on a stronger yen or the yen ETF FXY (quote):

Bottom line: Expect dollar weakness to remain a macro theme. And as long as the intervention is “unsterilized” (not balanced on the BOJ’s balance sheet with debt), it could cause inflation in the otherwise inflation-starved Japanese economy.

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