[B]Equity markets pushed higher this week as better than expected data out of China gave the markets a boost to begin the week.[/B] The industrial output showed that although the PBOC continues to limit lending, the Chinese economy is still growing at a robust and sustainable pace. Momentum continued to grow on itself, pushing the S&P 500 Index up 1.5% to close at 1126.
[B]The move by the BOJ was the first intervention in six-years, and what still appears to be a record single day amount, managed to lift the dollar three yen. [/B] The staggering amount of approximately 2 Trillion Yen, shows the resolve of the BOJ. There has been some international criticism, but not from ministers of finance, central bankers, or of course prime ministers. U.S. Treasury Secretary Geithner did not address the intervention in his appearance before the Senate committee. With the intervention funds settled Friday, and no offsetting BOJ operation to mop it up, it still appears to have been unsterilized. In terms of policy, if the BOJ does not come back at the start of next week, the market may begin testing its resolve. Historically, interventions have only temporarily succeeded in changing the direction of a currency. Additionally, unilateral interventions have had very little success in changing the direction of a market. The intervention has also sparked speculation that the BOJ will take some additional measures at the early Oct policy meeting. Such measures could include extending the JPY30 trillion facility, cutting 0.10% it pays on reserves, which acts as the floor for rates and increase JGB purchases operations. Moody’s said that the BOJ has greater scope to expand its balance sheet. What Japan will do with the dollars it purchased is fairly clear and obvious: Treasuries and agencies. The market anticipates this bid. It is also important to consider what the Japanese banks will do with the yen they were given. Clearly the government hopes they lend to businesses, but corporate Japan is sitting on a large cash surplus as it is. Second choice, the Japanese government hopes that the banks sell the yen and buy foreign. There had been strong Japanese portfolio capital outflows in July, but the pace has slowed more recently. The weekly MOF report may take on new interest. The funds could also simply sit in the money market or further out on the curve.
Analysis provided by Exto Capital