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China Revaluation May Prompt Japanese Intervention

There is nascent speculation Japan may ramp up its purchases of Treasuries and agencies to stem appreciation of the yen if and when China revalues its currency, which it is under increasing pressure to do.

There is nascent speculation Japan may ramp up its purchases of Treasuries and agencies to stem appreciation of the yen if and when China revalues its currency, which it is under increasing pressure to do. The thinking is Japan would buy dollar-denominated assets, as in Treasuries and agencies, if China revalued the yuan, which would also likely cause the yen to appreciate overnight. Last year Japan's holdings of Treasuries surged after well-publicized currency interventions, the last of which was in March. Japan is the world's largest holder of U.S. securities and any intervention would likely provide a boost to U.S government bond instruments.

The speculation is being fueled by a Nikkei Financial Daily article, published last week, which quoted an unnamed senior Bank of Japan official as saying a Chinese revaluation would be an "excuse for carrying out a yen-selling intervention." Japanese officials have been loath to admit how a Chinese repeg will affect their currency or central bank activities, but the conventional wisdom is it would strengthen all Asian currencies as it reduces other countries' need to buy Treasuries to shore up the dollar.

Any intervention would likely come swiftly after revaluation, predicted Sean Callow, currency strategist at IDEAglobal. "I imagine their traders are ready to move almost immediately," he speculated. He noted the amount of dollars purchased would depend on the amount of revaluation and declined to estimate how much in Treasury purchases this would translate into. Several other professionals contacted late last week by BW were not yet aware of the article and were unable to discuss its ramifications.

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