Japan unveiled a $100 billion credit line on Wednesday for companies investing overseas, tapping its foreign reserves for a third time in as many years, and stepped up monitoring currency positions of financial institutions in an attempt to curb the yen's strength.
The ministry of finance (MoF) plans to extend dollar loans, jointly with Japanese banks, to companies looking to invest abroad and said it hopes to "prompt private sector's conversion of yen to foreign currencies, to stabilise markets." Finance Minister Yoshihiko Noda said he hoped the measures would reverse excessive rises in the yen that hurt Japan's export-reliant economy, which is just emerging from the devastation of the March earthquake and tsunami.
But the dollar fell against the yen as market players were disappointed there was no explicit mention of currency intervention, and doubted the effectiveness of the new steps in turning the weak-dollar tide. "There are limits to what the government can do when such a big market force is driving up the yen. This facility won't curb yen rises," said Tomoko Fujii, FX strategist at Bank of America Merrill Lynch in Tokyo.
In a news conference announcing the measures, Noda repeated his warning to markets that Tokyo may intervene to weaken the yen, saying he was watching more carefully than before whether there is any speculative activity in the market. "We won't exclude any options and will take decisive action when necessary," Noda said. "We decided to compile the package to show our strong determination that we will act if current yen rises persist, or if the yen rises further."
The Bank of Japan also said in a statement that it would continue to watch how currency moves would affect the economic outlook, signalling its readiness to ease monetary policy again if yen gains threaten the economy's recovery prospects. This is the third time that Japan tapped into its foreign reserves to stabilise markets amid global turmoil since the financial crisis of 2008.
The credit facility, to be in place for a year, is aimed at facilitating companies' acquisitions of overseas firms and energy resources, the MoF said in a statement. The government will also require major financial institutions operating in Japan to report on currency positions held by dealers on a daily basis until the end of September to strengthen monitoring of markets and ensure their stability.
Asked if the result of the monitoring could lead to any action against financial institutions, Noda only said it would depend on the outcome and that the initial goal was to gain more information about markets. Market players say the move is an attempt to discourage investors from building up speculative short-dollar positions, but will be unsuccessful because it does not apply to the overseas players who appear to be largely driving up the yen.
Some currency traders even fear that the monitoring step could diminish liquidity and volatility during Tokyo hours by scaring away investors from the Tokyo market. Japanese authorities intervened unilaterally in the currency market and eased monetary policy on August 4. But the steps have not stopped investors from seeking the yen as a safe haven against risk, with the dollar hovering around 76.65 yen on Wednesday, now far from the record low of 75.94 yen hit last week. Markets are bracing for another round of intervention but doubt if it would be effective in weakening the yen, particularly with little likelihood Tokyo could persuade its Group of Seven counterparts to act jointly in the currency market.
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