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Intervention forms a central theme going forward, but it may not reverse the yen's decline


  Hawkish comments from central bank Governor Kazuo Ueda helped the yen rebound sharply on Monday, with most agencies saying that this did not indicate that a bottom had been confirmed for the currency and that there would be continued downward pressure and subsequent intervention ahead, with the only certainty being that short-term volatility would intensify further.

  Intervention constitutes the core driver of the yen's movement, and the Finance Ministry will not act lightly...

  Sean Callow, senior currency strategist at Westpac, said: "History shows that levels matter to a certain extent, so before 150 the frequency of verbal intervention may increase and there may be some signs that a move is imminent, but successful intervention usually requires some surprise, so Treasury doesn't want to take it lightly." The main argument against recent intervention is that the 5.38 per cent difference between Bank of Japan and US Federal Reserve rates justifies yen weakness. Most market participants probably view the decline since April as consistent with fundamentals."

  Mari Iwashita, an economist at Daiwa Securities, said: "I think the government has expressed its displeasure to the boj and wants the bank to do its part in dealing with the weak yen. I don't think the government is going to intervene with limited ammunition."

  Central banks may bear a greater share of the burden in this round of currency support...

  Taro Kimura, an economist at Bloomberg Economics, said: "The boj is sensitive to a weaker yen because it will lead to more cost-driven inflation, and what the central bank needs is demand-driven inflation. We think the BOJ is also concerned about damaging second-round effects on inflation."

  In any case, intervention is ultimately futile...

  Masahiro Nakai, interest rate strategist at SMBC Nikko Securities, said: "The difference in macroeconomic fundamentals will weaken the authorities' willingness to intervene as US Treasury yields will continue to rise, putting continued pressure on the yen. Yen intervention will prove futile and may even accelerate yen weakness."

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