Capacity for further forex intervention under scanner

Tokyo: Japan intervened in foreign exchange markets last week for the first time in more than six years, selling as much as 1.86 trillion yen (Dh79.63 billion) to pull the currency back from a 15-year high against the dollar.

The estimate is based on Bank of Japan (BoJ) money market data and if correct means the intervention was a record amount for a single day of official yen selling.

The last time Japan intervened, authorities sold 35 trillion yen over a 15-month period up to March 2004. Below are some questions and answers about Japan's capacity to intervene in the currency market:

How does Japan finance currency intervention?

By law, the government has no right to print cash and has to fund its intervention by issuing financing bills (FBs), usually of three-month duration. It sets the intervention amount and the BoJ, which has the right to print cash, acts as its agent.

Intervention is managed through a special foreign exchange budget account that is reviewed each year by parliament as part of the regular compilation of the budget.

How much money is in Japan's intervention war chest?

The special foreign exchange budget account currently limits borrowing for intervention to 145 trillion yen. Tokyo boosted the ceiling this fiscal year by 5 trillion yen, the first increase in six years, sparking market speculation the government was signalling its willingness to intervene.

However, more than 100 trillion yen of the borrowing is used to fund the existing foreign reserves.

So after Wednesday's selling, the available ammunition for fresh intervention is about 34 or 36 trillion yen, roughly the same level as the 35 trillion yen Japan used for intervention between January 2003 and March 2004.

Are there other options for financing intervention?

The ceiling is not set in stone. The Ministry of Finance (MoF) could raise the ceiling in a special budget request, a step it took in the midst of 2003-2004 yen-selling intervention. However, that would require parliamentary approval.

In addition, some in the MoF are already concerned that steadily rising issuance of short-term bills could distort supply and demand in the debt market, making authorities more cautious about intervention.

The MoF could also sell foreign assets to the BoJ. In 2003, the central bank agreed to lend up to 10 trillion yen to the MoF in exchange for US Treasuries under repurchase agreements.