[Viewpoint] Japan’s futile yen play

You may think this is a good time to bet against the yen now that Japan has intervened in the currency market for the first time since 2004.

Think again.

George Soros and his ilk should be betting on yen strength for two reasons.

One, Japan sold yen unilaterally, not with the help of the Group of Seven. Two, a top official made the mistake of telling speculators which level to attack.

Neither action seems particularly bright today. Without the Federal Reserve and European Central Bank on board, yen intervention won’t work. Only the fear of concerted actions will keep the Soros types of the world from testing the yen’s ability to rise. And a government should never, ever tell traders their line-of-defense level.

Chief Cabinet Secretary Yoshito Sengoku brought furrows to many brows in Tokyo by doing just that. Not only did he say that the Finance Ministry considers 82 yen per dollar the level at which they will fight markets, he went a step further, saying the government is seeking to gain the understanding of the U.S. and Europe for intervention.

In other words, not only did the Fed and ECB not help out, but U.S. and European policy makers aren’t convinced such steps are needed or will work.

It really is open season on yen speculation.

It’s highly debatable whether intervention works in the best of times. Yet Japan is so obviously pushing on a string here. The yen is at 15-year highs because the dollar and euro are falling, and for very valid reasons.

Yes, Japan is bearing a disproportionate brunt of currency dynamics. Yes, the yen’s jump is terrible news for its all-important export industries. And no, executives at Toyota Motor and Hitachi can’t be happy to see their competitiveness waning while China’s is surging thanks to an undervalued yuan.

Things are what they are, though. In a world awash in turmoil, nations that carry trade surpluses see their currencies rise. Japan dragged its feet these last 10 years on raising its economy’s game. So now it faces a double whammy of uncompetitive industries running up against a rising exchange rate.

That’s undermining stocks and holding 10-year bond yields around 1 percent. It’s an astoundingly low yield for a nation with a public debt that’s roughly twice the size of its economy. And it’s creating a surge in demand for higher yielding investments like samurai debt, yen-denominated notes sold in Japan by overseas borrowers.

The sour mood also is promoting a search for overseas investment opportunities. Hence Japan’s move to woo Arnold Schwarzenegger. California wants a high-speed rail route between Los Angeles and San Francisco. Japan’s trains are state of the art and the nation is cash-rich at a time when Schwarzenegger’s state faces a $19.1 billion deficit.

Japan said it’s ready to lend California money to help pay for the $40 billion-plus project. It would seem the perfect financial fit.

Borrowing cheaply in yen and reinvesting the funds in riskier assets is a favorite pastime of investors. And now, Schwarzenegger has officially joined the yen-carry trade.

China and Korea are also vying for California’s business, and Schwarzenegger visited both nations this week.

Yet Japanese officials were heartened to hear the star of the “Terminator” films quip in Tokyo that “Japan has a genius mind. California wants to have that kind of mind and technology to build our high-speed train.”

If only Japan’s leaders were acting like geniuses these days. A day after winning reelection as the head of the nation’s ruling party, Prime Minister Naoto Kan took a bold step that failed many a financial IQ test.

Kan, in office since June, risks looking silly in the weeks ahead if the yen remains strong, as the odds favor.

Japan’s last major foray into markets proved futile.

In the 15 months through March 2004, Japan spent more than the equivalent of Sweden’s gross domestic product weakening the yen. The currency’s risen 22 percent since then.

Soros would be nuts not to get in on this fiasco. In 1992, he made $1 billion breaking the Bank of England’s defense of the pound. Perhaps he could repeat that performance testing the Bank of Japan. Officials here are unwittingly making it worth speculators’ while.

*The writer is a Bloomberg News columnist.

by William Pesek