Of anniversaries and odd couples in Japan Well, we're cheating a bit here as the anniversary was two days ago, but it still allows for a discussion of the "government versus the central bank" thing going on in Japan and gaining traction everywhere else. It's been just over a year since Japan's Ministry of Finance last threw a whole heap of yen at the US dollar - the selling started on October 31 and ended on November 4. But any feelings of nostalgia should be swiftly contained as a repeat remains unlikely. However, where the MoF has slacked off, the Bank of Japan has stepped in, amid increasing pressure from the government. Nomura's Yujiro Goto says that the BoJ's "monetary policy is now gradually approaching USDJPY targeting- like policy." Currently the yen sits at Y80-ish against the dollar. Although authorities have suggested Y80 is a tough level for struggling Japanese exporters (we've discussed other options to help keep the yen weak here and here) it's not close to what is considering to be intervention territory at near Y75 (click chart to enlarge): But, if the MoF did decide to fire again, they'd have the ammunition to do so in the form of roughly Y75tn of usable funds: Nomura make the point that FX intervention is conducted via a separate account called the Foreign Exchange Fund Special Account and, thus, intervention is possible regardless of the deficit funding Japanese government bond issuance bill - aka Japan's own fiscal cliff. But, if you look back at the charts above, the big shift in the yen came after a bout of BoJ easing in February - Valentine's Day to be exact. That might have convinced the Japanese powers-that-be that the BoJ is the tool best suited to the yen-weakening job. Although, even the BoJ's valiant attempt failed to arrest the wider trend towards yen strength in a world dominated by risk. From Nomura again (with our emphasis): From 2010 to 2011, the BOJ's balance sheet expansion has been in tandem with cumulative FX interventions by the MOF, while the balance sheet fluctuated due to short-term liquidity injections. While Japanese FX interventions must be sterilized under the current system, balance sheet expansion of the BOJ at the same time as the MOF intervention is regarded as unsterilized intervention. Thus, the BOJ helped the MOF to increase the efficacy of intervention by essentially un-sterilizing the intervention (while the BOJ denies this as acknowledging it could erode the independence of the Bank). The same situation occurred in the early 2000s when the BOJ conducted quantitative easing for the first time. However, the BOJ has been easing monetary policy this year while the MOF stopped FX interventions. As a result of additional easing decisions without FX interventions, the BOJ's balance sheet is increasing at a much faster pace. The cumulative increase of the BOJ balance sheet has reached JPY7.4trn while the MOF has not intervened at all. The situation looks set to continue in 2013 unless the MOF intervenes in the FX market substantially. Clear divergence between recent expansion of the BOJ balance sheet and cumulative intervention suggests to us that the authorities" main policy tool has been shifting from FX interventions into BOJ monetary policy, unlike the era of QE1 and 2010-11. And that idea is backed up by recent evidence. We've just had two months of consecutive easing - the last time that happened was in 2003 - and that statement. Once more from Nomura: The joint statement was the first time since the BOJ obtained its independence under the current BOJ law. The statement officially expresses that political influence on the Bank is now rising. Even though the Bank kept its more optimistic inflation forecast than private forecasters, it gave up stating inflation would reach 1% in FY2014. As a result of the lower inflation forecast and persistent political pressure, which was strengthened by the joint statement, the BOJ is expected to be forced to ease further, unless the economy and USDJPY show clear improvement. While the Bank should be independent from the government, its independence looks to be weakening. Heck, have a look at these quotes from Japanese officials over the past 24 hours. As Citi's Steven Englander said, even the US Fed has not been as explicit in discussing QE. First from Bloomberg: A weaker yen "isn't our main objective but it's a common understanding that an accommodative policy eventually leads to the depreciating of one's own currency," [BoJ] Executive Director Hideo Hayakawa, 58, the official in charge of overseeing the financial system, said in an interview in Tokyo yesterday. Then from Reuters at the G20: "I told them that the strong yen persists in spite of the fact that Japanese economic fundamentals are not solid and that it poses a major downside risk to the Japanese economy," [Finance Minister Koriki] Jojima told reporters late on Sunday. There weren't any particular objections and I took that as showing other countries understand our concerns on currencies. All of this suggests an ongoing and sustained attempt to weaken the yen, lead by a BoJ being heavily leaned on by the government/ MoF. It's something that is only likely to increase as changes at the top of the BoJ are implemented in the coming months. It's also a dynamic that might deliver an actual game changer - something that is probably needed to shift the yen's longer term trend: Related links: Japan as the new Switzerland... FT Alphaville A currency war campaign plan for the BoJ - FT Alphaville The Bank of Japan under political pressure - Gavyn Davies FT