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Subject:  Re: Japan to end interference Date:  3/28/2004  6:23 PM
Author:  splotto Number:  9759 of 36218


Japan has 2 types of US$ buying going on.

1. They have a trade surplus with us (as does most of the world). That means they have a lot of US$'s sitting around every day. They take these US$ and buy treasuries, GSE debt, etc. This helps prop up the prices of bonds, keeping yields low.

2. Japan also intervenes in the FOREX markets to weaken the Yen and drive up the US$. They do this to keep Japanese goods attractive to US buyers (this is important because Japan is an export driven economy). To intervene, they sell Yen to buy US$'s. This drives up the US$ and drives the Yen down maintaining the range they want. This leaves Japan again with lots of US$ lying around. They use these US$'s to buy treasuries and GSE debt again. This has the same effect as the buying done to offset their trade surplus.

Therefore, they are saying they will stop buying US$'s as FOREX intervention which means they now need to buy less treasuries. Less buyers = lower prices = higher yields.

Personally I don't buy it. They say they will still intervene when they see excess volatility. To me that means they will continue to support the US$.


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