Japanese government intervened in FX market in a massive way on Monday, October 31. The amount is said to be close to 8 trillion yen.
This intervention was rather peculiar and some say it was creative or well thought through. It started in the morning at around 10am. USD/JPY shot up to 78.50 level and then it started to lose steam. So far, this was a typical intervention. Then, the government came in again, pushing USD/JPY up to 79.50 level, which showed a rather strong commitment on their part.
What seemed most peculiar to me was that apparently the government kept USD/JPY level at around 79.20 level from 11:30am to 3pm. It was literally pinned at 79.20. The market now understands that the government was giving selling opportunities to the exporters. Not only the exporters, but retail speculative traders also got a great opportunities to buy JPY while the government was keeping USD/JPY artificially high. JPM reports that probably about 50% of the intervention amount was absorbed by those retail speculative traders on FX margin accounts.
Whether it is exporters or spec traders, the government provided an opportunities for them to sell USD and buy JPY as a trading counterpart. As a result, the government’s foreign reserves account will increase by another 100 billion dollars, adding more risk to the government’s balance sheet. And as JPY strengthens again, there will be an even larger valuation loss piling up in the government FX account, which ultimately needs to be borne by tax payers.
In short, intervention transfers wealth from all tax payers to a subset of population, i.e., exporters and speculative traders. If exporters report large profits and pay a large amount of corporate taxes and/or spec traders make a lot of money and pay taxes on their profit and spend the profits on consumption, this government’s “subsidy” may have some effect although it’s far from efficient. But so far, it appears only the wealth transfer has been taking place at tax payers expense and no return has been recognized.
We need to be mindful about these economic and financial consequences of market interventions, rather than just focusing on whether interventions work or not.