Konnichiwa!

Thats Japanese for "Hello" or "Good afternoon"

This week's news belonged to the land of the rising sun. The Bank of Japan did what it had been scaring the markets about for the first time in 6 years.

The BoJ, followed the Bank of China and intervened the currency markets selling an estimated Yen 2 trillion ($23 billion) on two consecutive days as the currency reached a low of 82.88 vs. the USD. As a result the yen depreciated over the last week closing near 85.8 vs. the dollar.

Rationale for intervention

Reasons for the intervention are largely quoted as protection of the country's exports after the currency has seen large appreciation over the past few months primarily due to China increasing its holding of the Yen in an attempt to diversify away from the dollar. The move accentuated by some safe haven flows.

The Political Angle

The intervention took place the very next day after Prime Minister Nato Kan had won the challenge thrown at him by opponent Ichiro Ozawa who had claimed currency intervention if brought to power. By this move, PM Kan showed in a way that he too "can" take decisive action against the "threat" seen on Japanese exports.

Possible Impacts

Currency intervention by a G7 country is a pact with the devil. Especially when it is not supported by other major central banks. Moreover, this makes it extremely difficult for the US to negotiate a stronger remnibi with China, who can now just take the Japanese example as a point for protest. Moreover it is not quite clear if currency appreciation will really make a large difference to exports from Japan as up until now Japanese exporters have pretty much been 'reaping' money.

In any case the future actions of Japan is worth to keeping an eye on. My guess is even though it may not seem very logical or "purely" political, its not easy to prove that Japan is not serious about intervention. The last time the BoJ intervened was a multiple set of actions lasting 15 months starting June 2003. Who's to say thats not whats going to happen again!

Let's try to make some money!

View: Long on the Japanese yen with some constraints

Rationale: Fundamental factors like China increasing yen holdings, flight to safety flows, momentum in the currency. Currency intervention being the constraints.

Product: Call option on the Yen with strike at 86 and knock-out at 82.

Product Rationale:

1. Long position on yen through the call option

2. Knock-out at 82 makes the option expire if USDJPY goes below 82. This significantly cheapens the option premium as we forfeit all upside beyond yen appreciating over 82.

Macro Support

1. Official talk of currency target threshold of USDJPY at 82. "We will not permit precipitous moves in the yen", said the Finance Minister.

2. The last time BoJ intervened, it lasted 15 months with multiple interventions from June 2003 to September 2004.

3. Political pressure from Ozawa likely to continue.

4. General tendency of the yen to appreciate