Japan intervened in the foreign- exchange market for the first time since 2004 after a surge in the yen to the strongest against the dollar in 15 years threatened to stunt the nation’s economic recovery.
Finance Minister Yoshihiko Noda told reporters in Tokyo the yen sales were unilateral. Chief Cabinet Secretary Yoshito Sengoku said the ministry “seems to think” 82 yen per dollar to be the line of defense, after it reached 82.88 earlier today. Government officials speaking on condition of anonymity have previously said volatility was a bigger concern than the level. One official said Japan is prepared to keep selling the yen in US trading after earlier operations in Europe and Japan.
Prime Minister Naoto Kan was under pressure from business leaders to stop the yen’s gains from undermining the exports propelling Japan’s growth. It may do little for the economy because Japan alone won’t be able to keep the yen from rising, said analyst Tohru Sasaki.
“In the medium-term it can’t change the overall direction” of the currency, said Sasaki, head of Japan rates and foreign-exchange research in Tokyo at JPMorgan Chase & Co, who yesterday said he perceived a bigger chance for intervention after Kan’s reelection as head of Japan’s ruling party.
The yen tumbled past 85 per dollar for the first time in almost two weeks, trading at 85.24 at 12.37 pm in London. The currency had risen more than 11 per cent from mid-May through yesterday. Against the euro, the yen fell 2.5 per cent to 110.61. The benchmark Nikkei 225 Stock Average jumped 2.3 per cent to 9,516.56.
Watching closely
The yen reached a level against the dollar “we couldn’t ignore,” Kan told reporters in Tokyo, adding that he will continue to watch the currency closely.
Japan’s currency has rallied amid concern about the durability of the US recovery and the effect of Europe’s debt woes. The yen typically gains when investors avoid risk because of the country’s current-account surplus and deflation.
Authorities decided to intervene today because the yen’s climb yesterday and overnight was due to traders’ views that Kan wouldn’t take such a step, said Junko Nishioka, chief economist at RBS Securities Japan Ltd in Tokyo. Kan’s opponent to head the Democratic Party of Japan, former DPJ chief Ichiro Ozawa, had specifically called for yen sales.
‘Bold’ pledge
It was incorrect for observers to judge that chances for intervention receded with Kan’s reelection, a government official told reporters on condition of anonymity. The official also said today’s yen sales were very large, without specifying a total, and traders were probably thinking intervention would come at 80 per dollar, so the step came as a surprise.
“Investors were starting to doubt the government’s commitment to its pledge that it would take bold action,” said Yoshimasa Maruyama, a senior economist at Itochu Corp in Tokyo. Kan and Noda in recent weeks repeatedly said that Japan was ready to take “bold” measures to stem the currency.
The Japanese government official said European and US officials were informed of the move in an effort to avoid a negative reaction. It took a while to convince Europe because authorities there didn’t like the idea, the person said.
US Treasury spokeswoman Natalie Wyeth declined to comment on Japan’s announcement when reached by telephone. China’s central bank declined to comment, as did spokespeople for the Canadian finance ministry and central bank, UK Treasury and European Central Bank.
BoJ liquidity
Japan’s central bank sought to strengthen the impact of the action by leaving the extra yen in the financial system. The BOJ historically would mop up the extra funds by selling domestic securities.
“The BOJ will provide abundant liquidity to the financial market by utilising the funds injected by intervention,” Bank of Japan board member Tadao Noda said at a press conference in Shimonoseki, western Japan today. The finance ministry makes the decision on currency interventions, with the central bank carrying out the operation.
Until now, the government has pressed the Bank of Japan to step up liquidity injections to help address the gains in the yen. The central bank last month increased a credit program by 10 trillion yen ($119 billion) after an emergency meeting. The step had little impact on the currency.
Top business executives have been calling for government action to stem the yen’s rise.
Coordination need
“We want verbal or actual intervention if the yen appreciates more than the current level,” Hiromasa Yonekura, head of Japan’s Keidanren business lobby, said at a September 13 press conference. “Rapid change should be managed,” Hiroaki Nakanishi, president of Hitachi Ltd, said this week in Tokyo.
Some analysts have said that official action by Japan might not weaken the yen for long unless it’s conducted together with overseas authorities. Kan said last week in a debate with Ozawa that getting international cooperation to halt the yen’s rise is “difficult.”
It’s “pretty unlikely” officials will be able to return the yen to the level “that companies are basing their profit forecasts” on, Nishioka at RBS Securities said.
