Pesek on the Financial Times: Just say they’re stupid and get it over with

February 10, 2007
By Ken Worsley

In his most recent editorial, William Pesek nearly makes a key point regarding possible BOJ intervention over exchange rates, but he falls short of pointing out what such a move would actually add up to. Pesek states that:

In the 15 months through March 2004, Japan spent the equivalent of Indonesia’s gross domestic product to keep the yen from rising against the dollar. The effort has much to do with why the Bank of Japan has $875 billion of currency reserves and why the weak yen is unnerving Europeans.

This is true; we know for sure that The Bank of Japan sold 14.8 trillion yen ($122 billion) from January through March 2004. And, as this website has pointed out: what effect did that have? Exactly the opposite: The yen gained value over the course of 2004, starting the year at 104.40 and finishing at 103.10. Let’s face it: A $122 billion intervention in global currency markets over three months barely makes a ripple, and could possibly cause a backlash.

Where’s the backlash? Well, most contrarian thinkers know full well that they should do the opposite of what the news says and experts claim; those of us who bet on the dollar against the yen throughout 2005 brought home over 200% returns, despite the financial media machine nearly unanimously claiming that the dollar would fall as the yen gained strength.

Pesek, a writer I quite admire, set out to criticize an editorial by the Financial Times, a rag I have little time or patience for, since it rarely seems to put people on the ground who are in tune with the working populace in the nations they are stationed in (yes, local language skills and being well-versed in customs matter). The Financial Times argued that Japan’s dollar reserves

are dead money that the BOJ could better employ elsewhere: other central banks, like that of China, would love such an opportunity. But most of all, selling down reserves would demonstrate to the world that Japan’s currency interventions work both ways, and that it is interested in the stability of the yen rather than in keeping it permanently undervalued.

Huh? So the Financial Times is arguing that the Bank of Japan should engage in an already proven futile exercise (currency market intervention), in order to strengthen the yen (which its businesses and politicians wouldn’t stand for anyway, now that exports account for 16% of Japan’s GDP, the highest level since 1985), because of the simple reason that “other central banks would love such an opportunity”?!?!

I don’t know what conclusion to draw other than the editors at the Financial Times took one hell of a day off on February 7th.

Filed Under Bank of Japan, Exchange Rates, Finance