Japan primed financial markets on Tuesday for currency intervention after the yen tested record highs, signalling it may try to tame the unit with a combination of yen-selling and monetary easing. A near 5 percent surge in the yen in the past month has raised concerns among exporters such as Toyota Motor that the currency's strength will harm the economy, already in recession following the March earthquake and tsunami.
The yen traded as high as 76.29 per dollar on the EBS platform on Monday, near its March record high of 76.25. Even as it pulled back to 77.40 on Tuesday, Japanese officials adopted a new, more direct tone, suggesting they were increasingly convinced markets needed a nudge to keep the yen at levels the economy could live with. "The yen is being valued stronger than we think ... I'd like to watch currency market conditions especially carefully today," Finance Minister Yoshihiko Noda told parliament.
Reinforcing a sense of urgency, the central bank will probably ease its monetary policy if the finance ministry decided to intervene and sell yen, sources familiar with the central bank's thinking told Reuters. There is no hard evidence yet that the currency is hurting economic activity and confidence. But Japanese exporters have been increasingly vocal in calling for official action.
Toyota, Japan's biggest carmaker, reported its first quarterly loss in two years on Tuesday. The company exports more than half the cars it makes in Japan and says every one yen drop in the dollar cuts its annual operating profit by 30 billion yen ($390 million).
The yen rise has been fuelled by broad dollar weakness as markets fretted a debt squabble among lawmakers in Washington will result in the United States losing its top notch AAA credit rating. A last-grasp deal to raise the US borrowing limit that is expected to be finalised on Tuesday and avert a disastrous default, eased some pressure on the yen.
But Noda made plain the currency was still too strong for Tokyo's taste. He said he was in discussions with the Bank of Japan and international partners about the yen's strength, which would hurt several sectors of the Japanese economy if it persisted.
"Japan could intervene in the currency market anytime," said Masamichi Adachi, senior economist at J.P. Morgan Securities Japan. "The authorities are likely waiting for a good time not in terms of yen's levels but such factors as market liquidity and changes in sentiment." "Because Finance Minister Noda is the prominent candidate for the next prime minister, he cannot afford to do nothing or request nothing of the BoJ," Adachi added.