Japan intervenes to weaken yen

Japan intervened in global currency markets on Wednesday to sell yen for the first time in six years in a bid to stop its relentless rise from threatening a fragile economic recovery. Fresh after victory in a party leadership contest, Japanese Prime Minister Naoto Kan appeared to be stepping up efforts to wrench the country out of deflation by targeting yen strength, which has weighed on stock prices and corporate profits.
Kan told reporters that Wednesday's intervention had some effect but the government was watching foreign exchange moves with a sense of urgency. A Japanese monetary source told Reuters that Japan continued to intervene in the currency market during New York trading hours, and traders at major foreign exchange dealers estimated Wednesday's efforts amounted to around $20 billion.
Even as the dollar surged 3 percent on the day against the yen, doubts about the ultimate effectiveness of Japan's unilateral yen selling spree abounded. A 15-month solo effort by Switzerland did little to tame the Swiss franc, and European Union officials said co-ordinated action always proves more effective.
Aside from apparently acting alone, Japan faces the stiff task of trying to put a halt to yen strength while other major central banks such as the US Federal Reserve may take more steps to ease policy that could weigh on their currencies. "It is far less clear that intervention will be effective in a world of zero interest rates and excess liquidity, but we think that it still makes sense for Japan to take action to try to arrest yen strength," said Richard Jerram, chief Asia economist at Macquarie Securities in Tokyo.
The dollar rose to 85.72 yen from its 15-year low beneath 83 yen, its biggest daily gain in nearly two years. It was last up 3.1 percent at 85.60 yen. The Japanese currency's rise has brought it closer to its record peak of 79.75 per dollar set in 1995 and has weighed on the Tokyo stock market's Nikkei average, which climbed 2.3 percent on news of the intervention.
Finance Minister Yoshihiko Noda, who will reportedly keep his post after a cabinet reshuffle, indicated Tokyo acted alone. Noda said he was in contact with authorities overseas, and analysts expected Japan to be spared international criticism. But a European Union source said Japan had not even informed the Europeans, or the United States, about the intervention.
US officials at the Federal Reserve, White House and Treasury declined to comment. Billionaire financier George Soros said Japan was right to act to bring down the value of the yen. "Certainly, they are hurting because the currency is too strong so I think they are right to intervene," Soros said at a Reuters Newsmaker event. The EU offered some sympathy for Tokyo's plight, saying too rapid yen appreciation could threaten economic recovery. But a top official said co-ordinated action would have been better. "Unilateral actions are not the appropriate way to deal with global imbalances," Jean-Claude Juncker, chairman of the Eurogroup of euro-zone finance ministers, said when asked about Japan's intervention.
Analysts doubt other countries would help Japan soften the yen because they need weaker currencies to boost exports and growth. Intense pressure from Washington on China to let its currency strengthen also makes attempts by major economies to dampen their currencies particularly sensitive. US lawmaker Sander Levin, chairman of a congressional committee holding hearings this week on China's currency policy, called Japan's intervention "deeply disturbing".
UNSTERILISED INTERVENTION Unlike previous forays, the Bank of Japan will not drain the money flowing into the economy as a result of the yen selling, sources familiar with the matter said. That indicated the central bank plans to use the sold yen as a monetary tool to boost liquidity and support the economy. Authorities that sell their own currencies to weaken them often issue bills to "sterilise" the funds and keep the excess money from becoming inflationary. In Japan's case, it wants to promote inflation since the economy has been dogged with deflation for much of the past decade.
"The government's aim, and the aim of authorities in general, is to add monetary injections to the economy," Callum Henderson, global head of foreign exchange strategy with Standard Chartered in Singapore, told Reuters Insider. "Unsterilised intervention should be yen-negative, it should be very bullish for higher risk assets, very bullish for stocks in Japan and obviously it should add to the impact of the intervention of the yen," he said.
The central bank may follow up with additional steps such as buying more government debt, economists said. Wednesday's action pleased Japanese exporters, many of whom had expected the yen to average 90 per dollar this fiscal year. "We applaud the move by the government and the Bank of Japan to correct the yen's strength," Japan's No 2 automaker Honda Motor Co said in a statement. Honda has pencilled in 87 yen per dollar in its estimates for the fiscal year to March 2011.