The Message Behind JCBs Announcement on Currency Intervention

By: John Lee | Wed, Mar 17, 2004
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We wonder why the JCB stepped out on Monday and announced its decision to stop currency intervention by the end of March.

Surely if JCB's desire is to have a weak yen, the last thing it wanted to do is invite the currency traders to come and short the dollar against the yen.

This announcement reminded us of what the Bank of England did two years ago to secure a low price for its gold sale. i.e. tell people what you are going to do before you do it.

It doesn't make sense.

The news came shortly after 12pm est on Monday. The yen/dollar rate buckled 1%+ immediately after the news.

Surprisingly, the yen/dollar rate recovered within minutes. What happened?

First let us share a real-life story we read -

3 young Canadian backpackers spent 1 hour planning their day in a tiny sandwich shop at a Tokyo subway station. Keep in mind the restaurant was tiny with very limited seating. It was a busy lunch hour.

While the backpackers were busy figuring out their route, the shop owner stepped out of the register, approached the backpackers and said

"Excuse me, as you can see, we are a small restaurant."

"Ah yes." One of the Canadians answered.

"Yes, but we are a very small restaurant." The owner explained.

The Canadians looked at the owner and one another dumbfounded, before they figured out that the owner was asking them to leave in order to make room to new patrons.

We visited Japan also. Japanese in our view are deliberate, they like to save face. They avoid confrontation, and instead they drop hints.

We don't think it's a coincidence that JCB came out one day before the Fed's rate announcement to make news. They were politely asking the Fed to raise interest rate to support the dollar. Failure to respond they hinted, the Fed would risk a plunge in the dollar index. JCB even specified a deadline for the Fed to act - the end of March.

In fact, we believe this was the second warning to the US government to put its house in order. The first warning came on January 28th when the following made headlines.

"Japan says to cautiously consider gold in reserves"

Again, you have to be quite mentally-challenged to declare the intention to buy gold, especially when you have USD $500billion in your pocket.

The Fed has essentially stuck its high nose at the JCB. We doubt that the Japanese will take this arrogance lightly. In the short term however, we don't expect JCB to stop buying the dollar anytime soon.

* * *
NEW YORK, March 15 (Reuters) -- The Bank of Japan is mulling ending its massive yen-selling interventions in the currency market by the end of March, the Nihon Keizai Shimbun reported from Tokyo in its early Tuesday edition.

"Some central bank officials predict that it will walk away from large-scale interventions by the end of this month and that the upward pressure on the yen ... will abate beginning in April," the Nikkei reported.

Many BOJ officials, as well as foreign central bankers, question Japan's strategy of intervening in the currency market to halt the appreciation of the yen, the influential Japanese newspaper reported on its online site monitored in New York.

The central bank is apparently hoping that it can stop concentrating on reining in the strong yen and shift its focus to policy options related to price trends and interest rates, the report said.

The BOJ has in recent months intervened to sell yen in massive amounts to protect its exporters, spending 7.5 trillion yen in January and around 3.34 trillion yen in February, or approaching $100 billion in all.

The Nikkei report caused ructions in the currency market where the dollar instantly slipped against the yen. It also hurt U.S. Treasury prices since the BOJ has been using part of its intervention proceeds to buy huge amounts of U.S. debt in recent months.

* * *
WASHINGTON (Reuters) -- A Treasury Department spokesman on Monday said U.S. policy in support of a strong dollar was unchanged and declined comment on reports Japan might trim its currency interventions. "There is no change in our strong-dollar policy," Treasury spokesman Rob Nichols said at a weekly briefing for reporters.

The U.S. policy also holds that interventions by governments -- large-scale buying or selling of currencies to affect their relative values -- should be kept to a minimum.

Nichols declined to comment on a report by Japanese economic daily Nihon Keizai Shimbun that the Bank of Japan might cut its large-scale intervention, which is aimed at keeping the yen's value from rising.

"We don't comment on specific market activity by foreign governments," Nichols said. The Japanese newspaper said many BOJ officials were questioning the policy of intervening in currency markets by selling yen to buy tens of billions of dollars to keep the yen's value weaker.

"Some central bank officials predict that it will walk away from large-scale interventions by the end of this month and that the upward pressure on the yen ... will abate beginning in April," the Nikkei reported.

On other topics, Nichols said Treasury Secretary John Snow had been invited to meet the presidents of the 12 regional Federal Reserve banks, which make up the U.S. Federal Reserve system.

Nichols said Snow and the Fed officials would hold a "social dinner" on Monday night and they would discuss current economic conditions among other topics.

The Fed's policy-setting Federal Open Market Committee meets on Tuesday to plot interest-rate strategy for the period ahead, amid universal expectation it will leave its key federal funds rate at 1 percent, its lowest level since 1958.

* * *

Japan says to cautiously consider gold in reserves...

Wed January 28, 2004 07:49 AM ET

TOKYO, Jan 28 (Reuters) - Japanese Finance Minister Sadakazu Tanigaki said on Wednesday he wanted to carefully consider whether to change the weighting of gold in Japan's foreign reserves.

Tanigaki told a parliamentary committee he thought it necessary to take a standpoint of diversifying assets in Japan's foreign reserves, which are mostly made up of dollar-denominated assets.

Asked about gold, he said he would think about it carefully.

"There are various discussions about the positioning of gold in foreign reserves, even among...currency authorities," Tanigaki said.

"If I say something too simply, I think there could be a large effect on gold I would like to consider it carefully," he said.

Japan's official reserves amounted to a record high $673.529 billion at the end of December, up from $644.569 billion a month earlier, the Ministry of Finance said this month.

Included in that amount were gold stocks which stood at $10.241 billion at the end of December, up from $9.80 billion a month earlier.


John Lee

Author: John Lee

John Lee, CFA
Executive Chairman,
Prophecy Development Corp.

JohnLee, CFA is an accredited investor with over 2 decades of investing experience in metals and mining equities. Mr. Lee joined Prophecy Development Corp ( in 2009 as the Company's Chairman. Under John Lee's leadership, Prophecy raised over $100 million through Toronto Stock Exchange and acquired a portfolio of silver assets in Bolivia, coal assets in Mongolia, and a Titanium project in Canada. John Lee is a Rice University graduate with degrees in economics and engineering.

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