Japan did not accept the need for a weaker dollar - BBH

Research Team at BBH, notes that the Japanese did not accept the need for a weaker dollar at the Shanghai G20 meeting.

Key Quotes

“Indeed, in the weeks leading up to the G7 meeting, Japanese officials wanted to secure a consensus, as they did after the 2011 earthquake and tsunami, for an official response to what it perceives as a disorderly, one-way, speculative dollar-yen market.

The media played up the difference of opinion between the US and Japan, but it seemed clear that Europe did not support Japan's position either. To be sure, Japan can still intervene, if it wishes. Even the recent revisions to the US Treasury's semi-annual report on the foreign exchange market do not preclude Japanese intervention. The quantitative threshold is intervention of more than 2% of GDP. Roughly speaking, this allows for nearly $100 bln of intervention.

While Japan could intervene, the bar seems high, especially ahead of the heads of state summit next weekend. Moreover, the objections raised by the US (and Europe) make the intervention a high risk venture. Unilateral intervention by Japan does not have a strong successful track record.

Failed intervention, over the objections, would be embarrassing and show weakness, when strategic ambiguity may be a better course. It could embolden the very speculators that Japanese officials argue are driving the yen higher. At the same time, it may serve to antagonize the nationalistic sentiment that Abe is nurturing to make it seem that the US is blocking Japanese intervention, even though the US has no veto.”