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Yen developments may hold lessons as SA considers rand action

1st October 2010

By: Terence Creamer
Creamer Media Editor


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It will be interesting for advocates and opponents of calls for aggressive intervention to weaken the rand to monitor developments surrounding the Japanese yen over the coming weeks and months.

The Asian currency fell from a its 15-year high against the US dollar in mid-September after Japan took unilateral action to weaken the unit, its first such intervention since March 2004.


The fact that the yen had appreciated to its strongest level since May 1995, or ¥82,88 to the greenback, precipitated the action.

It is believed that the Japanese government sold as much as ¥1,8- trillion, the equivalent of $21- billion, on September 15, 2010, in a bid to curb a currency trajectory that was felt to be threatening the ailing economy’s export-led recovery.


The move helped the yen slump 3,3% on the day, but it began to recover in the days that followed, and in the wake of some criticism of the move.

One of the harshest critics was Eisuke Sakakibara, who was Japan’s top currency official in the late 1990s. He told Bloomberg that intervention in currency markets should be avoided as a rule and even forecast that the yen could reach another record against the dollar before the year was out.

“Of course, there’s a short-term effect,” Sakakibara said. “For it to really work over the long term, the US has to be involved. The US has the [Chinese] yuan revaluation problem, so it’s not happy about Japan’s intervention.”

Japan’s previous intervention did not prove altogether positive. When, in 2004, the Bank of Japan sold ¥14,8-trillion in the first three months of 2004, following record sales of ¥20,4-trillion in 2003, the action failed to stem currency strength.

When the intervention began, the yen was trading at about ¥109 to the US dollar. It ended 2004 at ¥102,63.

Part of the problem, it seems, is the size of the market. Daily market turnover for dollar/yen trading averaged $568-billion in April, which Bloomberg reports to be about 14% of total daily trade in all currencies of $3,981-trillion.

Nevertheless, the Japanese government has stated that it will continue to intervene if necessary, notwithstanding the fact that some in the US have described the action as “deeply disturbing”.

From South Africa’s perspective, developments around the yen are well timed, given that our policymakers are being asked to consider allowing the monetary authorities to become more active in attempting to influence the value of the rand.

There is little question that the currency’s strength and volatility are a source of much pain for certain sectors, especially miners and manufacturers. There are also strong arguments for why the rand has become an impediment to growth and job creation.

But, equally, there are serious risks, not least because the policy could divert already scarce resources to a battle that cannot easily be won.

It would certainly be prudent, therefore, to monitor progress on the yen over the next few months so as to assess whether it is a war worth waging at all.

South Africa at the UN
Another big issue worth monitoring will be South Africa’s lobbying efforts at the United Nations (UN), where it is continuing to support efforts to reform key institutions, including the UN Security Council, while still standing for a nonpermanent seat on the body.

Since 1945, the council has had the same five permanent veto-wielding members, namely Britain, China, France, Russia and the US – a status quo that South Africa has long opposed.

South Africa, which occupied one of the ten nonpermanent seats in 2007 and 2008, has put its hat into the ring to serve again during the 2011/12 term. But it remains unhappy with mere nonpermanent representation and has intensified its lobbying efforts.

It has even gone so far as to directly link the failure to reform key international institutions, such as the Security Council, with the recent regulatory shortcomings that led to the global financial crisis.

International Relations and Cooperation Minister Maite Nkoana-Mashabane argued in New York recently that the economic crisis confirmed that the current structures and instruments of global economic governance were “largely inadequate” and “in need of reform”.

The country is also seeking reforms at the World Bank, the International Monetary Fund, the World Trade Organisation, and the International Labour Organisation.

“We actually link the current economic and financial crisis with the lack of change in these very important institutions,” she asserted.

“So, we would have been happier if, as the world emerged form this economic and financial crisis, we also emerged with a change at these very vital institutions of global governance.”

South Africa also argues that reform of the international financial architecture is necessary to ensure a system that is better equipped and geared to achieving Millennium Development Goals.

“We will continue to work with like-minded progressive forces to push for permanent change from within,” Nkoana-Mashabane said.


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