Iggy Pop and David Bowie could hardly have predicted how many Central Bankers would want to emulate the Bank of Japan’s approach to FX intervention when they wrote the famous song ‘Turning Japanese’. It seems, however, that every nation experiencing upward currency pressure wants to turn Japanese.
The BoJ, acting for the Ministry of Finance, began accumulating significant FX reserves to stem their currency’s appreciation way back in the early 1990’s. The rest of Asia followed suit in the wake of the Asian-currency crisis in the late 90’s as strong capital and trade inflows were soaked up by the monetary authorities and held as foreign reserves. South Korea, Taiwan, India, Thailand, Malaysia, Singapore and, of course, China, have all taken this route.
The BIG news today, however, is that the Reserve Bank of New Zealand has broken its 30 year ‘hands-off’ approach to currency intervention and is now actively accumulating reserves in preference to letting the NZD appreciate. The RBNZ has turned Japanese. The previous no-intervention policy was born out of reversed fortunes when the RBNZ attempted to support the NZD when it was under attack – this was a futile exercise simply because the size of the country and its reserves were miniscule compared with the might of the financial markets. Its a little different today since the RBNZ has the means to print unlimited quantities of NZD’s to buy foreign reserves – this means they can match any speculator who wants to go against them.
The disappointing aspect of today’s news is that it marks the end of the only truly free-floating currency in the global financial system. It also opens the RBNZ up to future pressure should the NZD’s fortunes turn negative, and a potential replay of the crisis in the early 1980’s.