More intervention to devalue the yen possible, says Japanese P.M.; China’s shenanigans on valuation of yuan under attack on Capitol Hill

Sept. 16, 2010 | Written by Jeffrey Winograd

Forex traders may see further action on yen – Japanese Prime Minister Naoto Kan said today that he is prepared to intervene again to prevent a strengthening of the Japanese yen against the U.S. dollar. Voicing his concerns over the danger that rapid fluctuations in the currency will diminish the desire of Japanese firms to invest at home and, instead, move their factories elsewhere, Kan said this could worsen domestic employment opportunities and harm efforts to overcome deflation. Kan said he will not hesitate to take “decisive steps if needed.” Forex traders are now searching for clues regarding a possible red line – the number at which the USD/JPY drops below a certain level – that will result in additional intervention. The size of the Bank of Japan’s intervention on Sept. 15 is now thought to be in the neighborhood of $22 billion. Such an intervention is generally thought to be more effective when there is international cooperation but it appears the BOJ acted unilaterally. A mild criticism came from a European Union official.

Washington bigwigs take aim at Chinese support of artificially weak currency – China’s exchange rate policy which staunchly supports a weak yuan (also called the renminbi) is in the spotlight during a two-day hearing of the powerful House Ways and Means Committee. The Chinese policy “is one of China’s many mercantilist policies that distorts trade and investment flows and places a drag on U.S. economic growth and job creation,” Levin said at the outset of the proceedings on Sept. 15. There is no question that China’s policies contribute to the “staggering” trade deficit the U.S. has with China, he stated. Treasury Secretary Timothy Geithner is scheduled for center stage at today’s hearing. Based on testimony prepared in advance of his appearance, Geithner is expected to say that the pace of appreciation of the yuan has not been fast enough and the extent of appreciation too restricted. The U.S. is searching its tool bag for possible unilateral action, as well as multilateral efforts, which will prompt China to act more quickly, Geithner plans to say. In the opinion of Geithner, the bottom line is that the yuan is undervalued due to “heavy intervention.”