Naoto Kan government intervenes in currency market to weaken yen
Naoto Kan stamped his authority on government policy, making the yen less of a one-way bet — even if the effects of intervention prove to be short-lived.
Japan waded into the currency market Wednesday for the first time in six years, buying dollars to weaken the surging yen, which is battering famed Japanese manufacturers like Toyota and Sony after spiking to 15-year highs.
The surprise move, a coordinated effort by the finance ministry and central bank, shows a newly empowered Kan stamping his authority on government policy and means the yen is now less of a one-way bet — even if the effects of intervention prove to be short-lived. Japanese officials would not provide a figure for how much yen the central bank sold in the market.
The currency has risen about 10 percent against the dollar this year, and business leaders were pressing the government for help. The yen's rise had gained momentum as worries about banks' exposure to the debt of European countries with stagnating economies triggered a search for safety. The yen and Swiss franc have been the prime havens for investors hoping to safely park their money this summer.
A strong yen hurts Japan's exporters — the mainstay drivers of the country's still-fragile economic recovery. It erodes their foreign income when repatriated and makes their products less competitive in overseas markets. Toyota Motor Corp. estimates that every 1-yen climb versus the dollar saps 30 billion yen ($351 million) from earnings.
In Washington, House Ways and Means Committee Chairman Sander Levin called Japan's currency intervention a "deeply disturbing development" and promised that Congress would be following the issue closely.
Levin is a Democrat from Michigan, home to U.S. automakers. He made his comments during a hearing on China's currency practices, which American manufacturers contend have cost millions of lost U.S. manufacturing jobs. "China is not the only country with a predatory exchange rate policy," Levin said.
The U.S. Treasury Department declined to comment on Japan's currency move.
The Japanese government now has a "sense of crisis" about the yen, said Tomoko Fujii, a senior currency strategist at Bank of America Merrill Lynch. Officials fear "further yen appreciation would undermine the Japanese economy," she said. Earlier in the week, Hitachi Ltd. president Hiroaki Nakanishi urged the government to tackle the strong yen, calling it a "big pressure" while trying to transform one of Japan's biggest companies into a nimbler operation.
The yen's rise has also underscored tensions with China. Some officials including the finance minister say China's purchases of Japanese government bonds might be helping to drive the yen higher even as Beijing keeps its currency tightly controlled to protect the country's exporters. The yuan has risen less than 1 percent against the dollar since mid-June when Beijing said it would allow it to trade more freely after keeping it virtually unchanged for 18 months.
After the Bank of Japan sold yen on Wednesday morning, the dollar jumped above 85 yen from its earlier low of 82.87 yen. It was the first currency intervention since March 2004. Stock investors cheered the move, sending the Nikkei 225 stock average up by 217.25 points, or 2.3 percent, to close at 9,516.56.
"We have conducted an intervention in order to suppress excessive fluctuations in the currency market," said Finance Minister Yoshihiko Noda. "We will closely monitor currency developments, and take firm action including intervention," Noda said.
But there was widespread skepticism that Tokyo can keep the yen on a tight leash without coordinated action by major central banks around the world. That suggests the stock market's advance could prove fleeting and that U.S. manufacturers are likely to continue benefiting from a weak dollar.
"The effect from Japan's solo intervention won't last very long. We have to see how the U.S. and European monetary authorities would react," said Yuji Kameoka, chief forex strategist at Daiwa Institute.
Japanese electronics giant Sony Corp. weighed in with a cautious statement, saying that companies could only do so much on their own. "While we welcome the latest currency intervention by the government and Bank of Japan ... we hope they will continue to closely monitor foreign exchange trends and take appropriate measures," it said.
Fujii, the Bank of America Merrill Lynch strategist, forecasts that the dollar will by year-end break under the all-time low of 79.75 yen hit in 1995.
The dollar's woes stem in part from market speculation that the Federal Reserve may restart buying Treasurys and other assets this year to try to bolster the U.S. economy. That would likely drive U.S. interest rates even lower, which would make some investments bought in dollars less appealing for investors.
"This could be a very tough time for Japanese authorities if the Fed really implements a massive quantitative easing," Fujii said.
The yen, meanwhile, is seen as a safe haven currency. Japan's government debt is largely owned by domestic investors, making the country less at risk to the capital flight that can occur when economic or political shocks cause confidence to collapse.
And even with interest rates near zero, Japan's real interest rate is higher because of persistent deflation. For foreigners, that means yen-denominated assets will look more attractive as prices keep falling.
China's acceleration of Japanese bond purchases — a strategy of diversifying its holdings of foreign assets which are currently concentrated in U.S. Treasurys — has also been blamed for contributing to the yen's rise. But the purchases as a proportion of all Japanese bonds on issue are likely too small to have a sustained effect on the yen.
Playing to a domestic audience, Finance Minister Noda told a parliamentary finance committee last Thursday that finance officials are monitoring Beijing's moves closely. "We are watching the development while closely coordinating with other financial authorities to find out what their intentions are," he said.
Japan's previous attempts to slow the yen's rise through intervention had little lasting effect. Between January 2003 and January 2004, Japan sold a total of about 35 trillion yen in a massive effort to fight deflation and slow the appreciation of its currency.
One reason that intervention is likely to be even less potent nowadays is that the global volume of the foreign exchange trading has grown rapidly in recent years. Since 2007, average daily turnover has risen 20 percent to $4 trillion, according to the Bank for International Settlements. That means intervention by a single government ends up being akin to a drop in the ocean.
More recently, Switzerland's central bank abandoned its efforts to soften the Swiss franc, which had risen rapidly in the wake of financial crisis.
Some analysts say the finance ministry's currency intervention may be more potent if the central bank follows with a policy change of its own. The Bank of Japan's next board meeting begins Oct. 4.
Central bank Gov. Masaaki Shirakawa wasn't offering any hints Wednesday, except to say the BOJ would pursue "strong monetary easing" and provide liquidity to financial markets.