On October 31, 1997, the IMF announced a rescue for Indonesia. Though it was Thailand who caught the Asian flu first, it was this latter country where a monetary line in the sand was drawn. Nobody wanted to find out what a complete wipeout of the Indonesia rupiah might mean for financial conditions across Asia. Included in that category of grave concern was, predictably, the Japanese.

Just a few days later, on November 3, Japanese broker Sanyo Securities went bust. Among Japan’s top ten securities outfits, it was the first of any serious size that had failed in that country going back to World War II. Given Japan’s struggles to come out of the aftermath of the eighties bubble collapse seven years earlier, this escalation in the Asian flu was judged particularly dangerous.

The same day Sanyo had its lights turned off, the Bank of Japan acting in concert with the Monetary Authority of Singapore announced further monetary measures on Indonesia’s behalf. Nowhere within them were yen or Singapore dollars. Both instead were actively selling US dollars (supplying) to buy Indonesia’s ailing rupiah. Sanyo’s exposure in this regard thus became quite obvious, as it wasn’t so much an Indonesia imbalance as overall “dollar” funding issue more generally spreading (contagion) across Asia.

Throughout November 1997, the Bank of Japan would commit about ¥39 billion in various arrangements including swap agreements in support of this early version of the global “dollar short.” They were ultimately unsuccessful, of course, as the Asian flu spiraled way out of control and took down what used to be called the Asian tigers. Japan then caught neck deep in the blowback sunk further into its lost decade – while being cruelly placed on the precipice for the start of a second one.

It’s somewhat of a mystery about whose dollars BoJ was selling in Indonesia (meaning in support of Japanese banks stuck with dollar liabilities tied to that country). There weren’t massive stockpiles of foreign reserves at that time, though BoJ did have access. I’ve often wondered if Japan’s central bank got itself into a bit of “dollar” trap by being so short after the operations, and then almost certainly being begged on a daily basis to do more.

In turn, BoJ was practically begging the Federal Reserve for relief. Outwardly, the Fed remained impartial believing that all of this Asian flu stuff was unrelated to them – despite the fact that it was dollars in the middle of everything. Their main policy concerns were any economic fallout from the overseas crisis. For the Fed, as would become painfully apparent again in August 2007, its mandates ended at the national boundary.

Or did they?

It’s one thing that Japanese banks were failing on a synthetic “dollar” short supplying financing in eurodollar markets to Indonesian counterparties. It’s quite another when the Bank of Japan comes calling for help (or the ECB in 2007). The Fed won’t address anything about the former, but is quite pliable when in touch with the latter. Given how history has transpired on both occasions, maybe this is backward?

Maybe it would have been worse if not for covert Fed operations. From February 1998:

MR. FISHER We took [blank] of bills into the SOMA account, selecting bills that we would be able to run off in the course of January so as not to make our need to drain reserves any worse at the end of the month. We sold [blank] for them in the market and took another [blank] out of the repo pool, where we have had an elevated cash balance for them, to help them in effect to meet their cash needs. We also actually arranged a transaction between the Bank of Japan and the Ministry of Finance during the period; one wanted to sell bills and the other to buy.

To this day the amounts of these operations are redacted from the official transcripts. I don’t believe there is any big conspiracy, more likely the same sort of determined ignorance that has governed the Fed across the two decades in between. These were probably big numbers, but monetary policymakers didn’t want to know what that really might have meant about the global monetary system – and surely didn’t want the public asking questions about why a matter between Singapore, Japan, and Indonesia would eventually and directly involve the US central bank to such a large degree.

And then there is the nontrivial matter of how none of it worked.

Indonesia doesn’t otherwise rate much attention on the global financial scale. That system is, however, uniquely vulnerable to “dollar” problems. They depend to a higher degree on foreign flows, the temperament of the overall eurodollar market if you will. The rupiah, therefore, can act as if an early warning.

That was certainly the case in the summer of 2013. The rupiah fell among the first of the EM connections to the eurodollar. And unlike others, such as Brazil’s real, it never really stopped until it was all over. Apart from a minor, short reprieve in early 2014, the rupiah kept on “devaluing” all the way into October 2015. The “rising dollar” for Indonesia wasn’t a typical crash, but rather a relentless squeeze that did just as much if not more damage for the country and the rest of Asia. Apart from the PBOC and Bank of Russia, the world’s central banks sat that one out.

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Reflation #3 has seen IDR behave in remarkable stability. From the autumn of 2016 forward, it’s as if the rupiah has been almost pegged sideways. I have no idea if it was, and there aren’t any indications to that effect, mostly just a reflection, I think, on the development of the “dollar” rebound following the end of the “rising dollar.”

That is both good and bad; the latter meaning despite much better sentiment and the development of the narrative of “globally synchronized growth”, nobody was really buying it surrounding at least Indonesia and the rupiah. Where was the rally? IDR retraced a tiny bit and though stable it was stable around 13,500 rather than 10,000 or better. The “rising dollar” for Indonesia and much of Asia had ended, but what did that really mean?

Not recovery, at least not in a meaningful manner. Now IDR in early 2018 has our attention again and for all the wrong reasons – those, in my view, related to JPY (and likely HKD) as noted earlier today.

The sideways motion of steadiness for the rupiah ended right in that same first week of September that saw a whole bunch of “dollar” indications shift. Perhaps unexpectedly, that at first meant an almost buying panic of rupiah against the dollar, before eventually and in short order settling into the usual IDR “devaluation” consistent with nothing good about global “dollar” conditions.

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As if that episode wasn’t sufficiently noteworthy, it was repeated just in time for the global stock market selloff in late January. Someone was in desperate need of rupiah just prior to the same bout of “dollar” illiquidity that shook global markets in serious fashion; and like September, it has triggered a backlash against IDR. The rupiah is today at a low not seen since January 2016, heading back toward 14,000 again for the first time since the eruption of “global turmoil” in the aftermath of CNY’s similar “devaluation” in the summer of 2015.

Does this mean another global monetary disruption is imminent? Not likely. What it does possibly suggest is that things are getting serious and that though Indonesia might not list too high on any catalog of currencies to be worried about, it does demand ongoing attention for all the same historical reasons – especially in combination with others similarly positioning.

Or, it’s all just the sublimely hawkish Haruhiko Kuroda’s latest fit of overconfidence. Perhaps Jerome Powell’s optimistic bravado.

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