Mon, Feb 03, 2003 page6

• Bank of Japan becomes foreign-exchange Ninja

  • By David DeRosa / BLOOMBERG
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  The Bank of Japan has changed its mode of operation in the foreign exchange market. It has become a Ninja.

  Ninja are the covert operatives of Japanese military lore.

  You can't see or hear them coming. Stealth is their craft.

  On Friday, a senior Finance Ministry official revealed that Japan had sold about ?700 billion (US$5.88 billion) in foreign exchange in the course of intervention operations since mid-January. And who knew about this? The purpose was to weaken the yen against the dollar. So what else is new? Foreign exchange interventions in Japan are ordered by the Ministry of Finance to be carried out by the Bank of Japan. What is different about these transactions is that the central bank never said a word about them until it came out last week. Presumably the trades were conducted under strict secrecy with selected commercial banks.

  Also puzzling is that the central bank did not enlist the help of other central banks to execute trades in various time zones other than Japan's. Some of the trades were conducted outside of the Tokyo foreign exchange time zone.

  Central banks like to make it look like a bigger splash by enlisting the help of other central banks. It is also a matter of central bank etiquette. One central bank doesn't like to execute transactions itself in another central bank's trading time zone.

  For that reason you expect the central bank to use the European Central Bank or the Bank of England in the European time zone or the New York Federal Reserve Bank in the US time zone. This time it was a go-it-alone operation.

  The puzzle is that central banks usually -- but not always -- prefer to be anything but Ninja-like when it comes to foreign exchange operations. Their favorite tactic is to make a loud and visible intervention, especially when it is large, which ?700 billion is.

  Still, the actual sum that a central bank expends during an intervention is small relative to the foreign exchange market. On top of that, most central banks, including the central bank, sterilize foreign exchange trades.

  In a sterilized foreign exchange intervention, the central bank does two or more offsetting operations to neutralize the effect of its foreign exchange trading on the money supply.

  For example, when the central bank buys dollars, that transaction on its own increases the Japanese money supply. The central bank can sterilize by selling domestic assets, a transaction that by itself lowers the money supply. If the amounts are equal the effects on the money supply will wash.

  This, of course, leaves the question of whether a sterilized intervention, even a loud one, can permanently affect the foreign exchange market.

  One school of thought is that sterilized intervention can't permanently affect the level of the exchange rate. But it can scare traders now and then. Often, exchange rates move violently during intervention. That's why the fear of future intervention is planted in the minds of foreign exchange traders.

  There is fear and then there is paranoia. Fear is where you are long yen, and you fear the central bank might be poised to strike. You fear the Bank of Japan and you expect to see it in the market any moment.

  Paranoia is when you are long yen and you are left to wonder if the central bank -- the Ninja central bank -- is in the market or not in the market.
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