Moody's warns against Japan FX action, BoJ on alert

Moody's Investors Service warned Japan that ineffective currency intervention would be negative for its sovereign ratings and would not help it restore its finances, even as G7 policymakers tried to show solidarity against market turmoil sparked by US and European debt woes.
The warning was a shot across the bow for Japan, saddled with public debt double the size of its $5 trillion economy, just days after the United States lost its top-tier AAA credit rating from Standard & Poor's. Finance Minister Yoshihiko Noda on Monday signalled Tokyo's readiness to continue intervening in the currency market to stem yen rises, citing a Group of Seven agreement to jointly counter any excessive and disorderly exchange-rate moves.
Moody's, however, said that while Japan's solo currency intervention and monetary easing last week initially pushed the yen lower against the dollar, the effect proved short-lived and was a negative for the economy and its credit rating. "Yen strength has eroded the competitiveness of Japan's exports and hampered the economy's ability to sustain its recovery from the 2009 global recession," Moody's said.
Currency and monetary policy action alone will not solve the bigger problems plaguing Japan, such as the huge cost for reconstruction from the quake and the nuclear plant disaster, as well as much-needed social welfare reforms to restore the country's fiscal health, Moody's said in a statement on Monday.
Major ratings agencies have all put Japan's sovereign rating on negative outlook as the country struggles to balance the need to support its economy, hit by a deadly earthquake in March, and to fix its public finances, which are the worst among G7 economies. Moody's announcement came hours after G7 finance leaders signalled their readiness to take co-ordinated action against excessive and disorderly currency moves.
A G7 telephone conference was arranged after worries of another US recession and concern about the eurozone debt crisis hit global stocks and pushed the yen up near record highs, as investors sought the currency as a safe haven. The yen's spike prompted Japan to sell 4.6 trillion yen ($59 billion) in the currency market last week and the BoJ to ease monetary policy to alleviate the pain to the export-reliant economy. Despite Moody's warnings, Japan may not have much choice but to rely on currency intervention and monetary easing to support its fragile economy.