For example, during the past two years the dollar has declined 29% against the euro, 27% against the British pound, but only 17% against the Japanese yen. This conspicuous underperformance of the yen can be explained by market interventions by the Bank of Japan. Its aim has been to limit the yen's strength against the dollar to protect Japan's export industry. Japanese policy makers fear that a strong yen may make exports to the important American market uncompetitive, and that a slow-down in the export sector may damage the Japanese economy.
Japan's commitment to keep the yen from strengthening against the dollar has been massive. It is explained well in a February 21, 2004 article in The Daily Yomiuri in Tokyo:
"The numbers are so staggering that I think it is justified to call the yen a de-facto pegged exchange rate -- pegged with an upper limit for the yen against the dollar. The facts speak for themselves. In 2003 Japan spent about $180 billion to protect companies against a rising yen. For this year Prime Minister Junichiro Koizumi's national budget raises potential intervention firepower by 61 trillion yen or about $580 billion. Put another way: After spending $15 billion on average every month in 2003, Japan now has the budget to spend $48 billion per month to protect its corporations from a falling dollar, and $48 billion is more than three times Japan's monthly current account surplus."
Given that their market intervention policy has been ongoing for months -- years even -- and that the war-chest for interventions for this coming year was already budgeted, the following news dispatch is astonishing.
Reuters, Tuesday, March 16, 2004
www.reuters.com/newsArticle.jhtml?type=topNews&storyID=4579962
"NEW YORK -- The dollar plummeted against the yen on Tuesday, reeling from a report late in the previous session that Tokyo could halt selling yen for dollars by the end of March…Japan's Nikkei Financial Daily reported late on Monday that Japan may stop currency intervention aimed at weakening the yen to boost exports."
It therefore appears that Japan has made an abrupt about-face. If these news reports are correct, they have decided to stop supporting the dollar with their currency interventions. But why?
So far, no one in Washington or Tokyo is talking. So a lot of explanations have been offered, to which I add my own, which can be explained by the following gold chart.
This past Friday, the yen's rate of exchange to gold closed at ¥44,018 per ounce (¥1,415 per goldgram). This weekly close is noteworthy. It is only one of 9 weekly closes above ¥44,000 (¥1,415/gg) since gold broke below this level in 1992. Clearly, ¥44,000 (¥1,415/gg) is an important resistance level, a conclusion that is obvious from the long time-span covered by the horizontal red line on the above chart.
Of these 9 weekly closes above ¥44,000 (¥1,415/gg), it is noteworthy that 5 occurred in 2003, and 3 have occurred already in 2004, including the highest weekly close of ¥45,244 (¥1,455/gg) in January. It is obvious that gold is close to breaking out of this important base in yen, which may explain Japan's about-face.
To explain this point, a huge amount of hot-money fleeing the dollar -- to avoid losing purchasing power from the dollar's decline -- has landed in Japan in search of a safe-haven. This money will tend to stay in Japan if the yen remains relatively strong, but it will flee to safer grounds if the yen gets debased along with the dollar. No doubt both Washington and Tokyo are watching this ocean of hot-money. In fact, they have to watch it if they intend to keep today's already overstretched and fragile money system from blowing apart. So these protectors of the status quo do not want to see large amounts of hot-money sloshing around from one currency to the next, making their job all the more difficult, which brings us back to the above chart and the critical ¥44,000 (¥1,415/gg) resistance level.
If gold takes out this resistance level, the warning bell will sound. It will be an indicator that the yen is being debased, and that as a consequence, the hot-money will start fleeing Japan, which is the last thing the policy makers want. So what do they do?
Japan abruptly reverses its long-standing policy of supporting the dollar, an important element of which was not letting the yen strengthen beyond ¥106.
Thus, Japan's about-face can be explained by one factor -- the desire to keep the hot-money parked in Japan. Japanese policy makers are sacrificing Japan's export industry and perhaps its economy in an attempt to prevent what they believe will be an even bigger problem, an ocean of hot-money fleeing a debased yen.
So watch the yen gold price to see whether Japanese policy makers are successful in keeping the hot-money parked in Tokyo. If the price of gold starts climbing above ¥44,000 (¥1,415/gg), we'll know that they have failed. In that case, look for a tidal wave of money to start flowing out of the yen into other currencies like the euro, British pound, Swiss franc and of course gold, which raises one last question. Is Japan really more concerned about the hot-money than protecting its export industry and economy?
There will no doubt be different answers to this question, but my view is that Japanese policy makers are deferring to the wishes of those who pull the strings in Washington, DC. They in turn are also looking at the above chart and no doubt worrying about how much more difficult the on-going effort by central banks to keep a lid on the gold price will become -- particularly now that commodity prices are exploding upward nearly across-the-board -- if all that hot-money starts flowing out of Japan and into gold.
So Japan is made to toe-the-line, to serve what DC sees as a bigger purpose than protecting Japan's export industry and economy -- to keep hot-money from leaving the yen and flowing into gold, at least until after the November election. Politicians don't want a rising gold price alerting voters about the inflationary problems now threatening the US economy.