Is the Japanese Financial Market Efficient? Evidence from the Yen
and the Nikkei 225 during the Week of March 14 – 18, 2011
Background: The following Bloomberg.com and FXStreet.com articles will provide
you with some background information on the movement of the Japanese yen
during the week and the impact of that on the Japanese stock market.
Yen Reaches an Almost 16-Year High Versus Dollar on Japan's Nuclear Crisis
Bloomberg.com March 16, 2011
The yen approached a 16-year high versus the dollar as Japan’s nuclear crisis intensified, increasing
speculation Japanese companies and investors will repatriate funds to help pay for earthquake and
tsunami damages.
“The pressures will be for dollar-yen to go lower on repatriation and reinsurance flows,” said Paresh
Upadhyaya, head of Americas G-10 currency strategy at Bank of America Corp. in New York. “People
have been using the dollar as a funding currency more than the yen.”
The yen gained 0.3 percent to 80.45 per dollar at 11:23 a.m. in New York, from 80.72 yesterday. It
earlier touched 80.34. The currency reached 80.22 yen on Nov. 1, the strongest since April 1995, when it
touched a post-World War II high of 79.75.
Japanese Bonds Rise as Yen Reaches Post-War High, Damping Recovery Outlook
Bloomberg.com March 17, 2011
The yen rose as high as 76.36 per dollar today, surpassing its post-World War II peak of 79.75 reached in
April 1995. A stronger yen makes Japanese exports more expensive overseas and reduces the value of
overseas earnings at the nation’s companies when repatriated.
The Japanese currency’s postwar high “reinforces speculation the yen’s appreciation and a drop in
stocks will continue,” said Kazuhiko Sano, chief strategist at Tokai Tokyo Securities Co. Ten-year bond
yields will decline to 0.9 percent between May and July, he said. Tokai Tokyo and RBS’s brokerage unit
are among the 24 primary dealers obliged to bid at government debt sales.
Japanese bonds rose, snapping a two-day drop, on speculation the yen’s advance to a post-World War II
high will hamper the nation’s economic recovery from its biggest ever earthquake.
Yields on 10-year debt fell toward a two-month low as stocks slumped around the world, boosting
demand for the relative safety of government securities. The extra yield investors demand to hold 40year bonds instead of 10-year debt widened to the most in three years on speculation the government
will increase issuance of longer-term debt to finance rebuilding.
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“Buying prevails in the bond market on demand for safe assets on the back of the yen’s appreciation and
the slump in stocks,” said Akito Fukunaga, chief rates strategist at the brokerage unit of Royal Bank of
Scotland Plc in Tokyo. “It’s necessary to evaluate a balance between selling spurred by concern about
Japan’s worsening fiscal health, and buying caused by risk aversion and a possible economic slowdown.”
G7 Meeting Set for Tomorrow
Group of Seven nations’ finance chiefs will discuss Japan’s crisis on a conference call at 7 a.m. Tokyo
time tomorrow (Friday), Japanese Finance Minister Yoshihiko Noda said today. The G-7 is made up of
the U.S., Germany, France, Canada, Italy, the U.K. and Japan.
French Finance Minister Christine Lagarde said yesterday she wanted to convene G-7 talks on the
financial response to Japan’s earthquake. “I’ve asked for a G-7 meeting at the level of finance ministers
and central bankers to see how we can purchase their bonds and how to respond on the financial level,”
she told reporters in Paris.
Yen Exchange Rate: February 9, 2011 through March 17, 2011
The Chart below shows the movement of the yen through Thursday, March 17, 2011, the day before the
G7 meeting. Note the strengthening began around the time of the Japan crisis.
© 2011 by Prof. Werner Antweiler, University of British Columbia, Vancouver BC, Canada.
Time period shown in diagram: 9/Feb/2011 - 17/Mar/2011
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It is all about G7 teleconference, Yen eyed
Thursday, March 17 2011, 20:38 GMT
FXstreet.com: Markets are focusing in one special event scheduled at 22GMT. At this time, investors
around the world have a must follow teleconference of the G7, where Japan will try to plea its
international allies for economic support and a global coordinated intervention to stabilize the Yen, a
major concern not just by the quake-stricken Japanese economy but for the sanity of readjusting world
trade prosperity around the world.
The responsibility for managing the unsustainable Yen exchange rate extends now far beyond the
leadership in Tokyo to become a global political issue. According to James Coleman at Forexlive. “the
Nikkei reported that the G7 had given Japan the green light to intervene but early signs were that the
intervention would be solo, not coordinated among the whole group”. At present, USD/JPY trades quiet
around 79.00.
Joint intervention in the Japanese Yen
Friday, March 18 2011, 00:12 GMT (9:32 Japan Time)
FXstreet.com: G7 just released its official statement and the decision reached was joint intervention in
the FX market. There is a lot of unity backing up the Bank of Japan in these difficult times.
UK, ECB and Canada to join in for coordinated intervention. There seems to be good will from the
international community to help Japan.
Japan FinMin said they will communicate the size of intervention but only 2 months after. Just news
coming in from a MOF official saying "Japan is now buying USD/JPY".
The Yen is moving sharply lower. USD/JPY has surged to 80.60, EUR/JPY regained 112.50 GBP/JPY
seeking 130.00 while AUD/JPY does so towards 79.50
BoJ has rushed to make a move not letting the dust settle, seems willing to use all the bullets at once
and finally give up the jawboning play.
"The last time there was a coordinated effort was in 2000, when central banks stepped into the market
together to support the euro. Since then, they had opted for verbal intervention by changing the
language in G7 statements” commented Kathy Lien, Director of Currency Research at GFT.
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G-7 Sells Yen in First Joint Intervention in More than Decade
Bloomberg.com March 17, 2011
The Group of Seven will jointly intervene in the foreign exchange market for the first time in more than a
decade after Japan’s currency soared, threatening its recovery from the March 11 earthquake.
Japan began the effort, sending the currency down 3.1 percent against the dollar at 9:34 a.m. in Tokyo.
Each of the G-7 members will sell yen as their markets open, Japan’s Finance Minister Yoshihiko Noda
told reporters in Tokyo today. The G-7 said in a joint statement after a conference call of its finance
ministers and central bank chiefs that it will “provide any needed cooperation” with Japan. “It will be
supportive for the economy if they can manage to stabilize the yen,” said Thomas Harr, Singaporebased head of Asian foreign-exchange strategy at Standard Chartered Plc. “You will have better chance
of succeeding when you have the joint intervention rather than just Bank of Japan.”
The G-7 said in its statement that “in response to recent movements in the exchange rate of the yen
associated with the tragic events in Japan, and at the request of the Japanese authorities” it will
intervene in the currency market today. “We will monitor exchange markets closely and will cooperate
as appropriate,” the statement said.
First Since 2000
G-7 members hadn’t entered the market together since September 2000, when they sought to buoy the
euro as it tumbled in its second year of existence. The U.S. Treasury’s participation was its first since
September 2000, ending the longest period of American inaction in foreign-exchange markets since at
least 1973, according to department figures.
Break-Even Exchange Rate
Japan’s exporters say they can remain profitable as long as the yen trades at 86.30 per dollar or weaker,
compared with the previous year’s breakeven point at 92.90, an annual Cabinet Office survey showed
on March 11.
Noda and Economic and Fiscal Policy Minister Kaoru Yosano sought to quell speculation driving the yen
higher yesterday. Noda said markets were nervous and Yosano said there was no basis for an argument
that the nation’s insurance companies were repatriating foreign assets to pay for earthquake damage.
“The speculation was that Japanese life and casualty insurers will repatriate dollar-denominated assets
to secure funds in the wake of the earthquake,” Yosano told reporters in Tokyo yesterday. “But they
have ample cash, deposits and other liquid assets,” he said, adding that the Financial Services Agency
and Bank of Japan have confirmed insurers aren’t selling their dollar assets.
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Response of Yen and Nikkei 225 to Central Bank Intervention
Recall from class (Lecture 6; The Role of Expectations in Financial Markets), we noted that if financial
markets are efficient they will respond in a particular way to “anticipated” events. According to Nikolai
Chuvakhin (“Efficient Market Hypothesis and Behavioral Finance – Is a Compromise in Sight?”), we can
illustrate the asset response to a positive anticipated event as follows:
In the above illustration, if the markets are “anticipating” a positive event, asset prices would drift up for
some time before the event and then stabilize if the event was consistent with expectations.
In the case of the Japanese yen and the Nikkei 225, we would expect to see both the yen and the Nikkei
225 reacting before the actual announcement of the intervention. The prior reaction would occur
because the market is discounting this anticipated positive event on spot asset prices. Thus, the yen
should weaken (consistent with intervention) and the Nikkei 225 should strengthen (consistent with a
weaker yen benefiting the Japanese economy). Additionally, after the event occurs, we would expect to
see both the yen and Nikkei 225 stabilize for a while.
The charts below show both the yen and the Nikkei 225 prior to the 9:30 formal announcement from
the G7 about their decision to engage in coordinated intervention.
Note that the yen started to weak prior to the announcement. The Nikkei 225 opened at 9:00 (30
minutes before the formal announcement) up 2.2% from its close the day before. Also note both the
yen and Nikkei 225 stabilized after the announcement.
The reaction of both the yen and the Nikkei 225 appear to be consistent with the efficient market
model.
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Chart 1: The Yen Exchange Rate (Note: vertical dotted line refers to
approximate time of formal announcement; time scale is Japan time)
Chart 2: Nikkei 225 prior to formal announcement (Open time 9:00am)
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