Japan Says Yen Rise Not Due to Fundamentals

The recent surge in the yen does not reflect Japan's economic fundamentals, Economics Minister Kaoru Yosano said, adding that an interest rate cut by the Bank of Japan would affect neither the currency nor the economy.

Reflecting growing concern over the recent volatility in market moves, Finance Minister Shoichi Nakagawa said the government would ban from Tuesday naked stock short-selling, in which traders effectively sell stocks without first borrowing them to sell.

But Nakagawa would not comment on whether Japan will intervene in the currency market to tame further yen gains.

The yen has leapt about 20 percent on a trade-weighted basis this month as investors unwound carry trades, in which they borrowed the low-yielding yen and sold it to buy assets offering higher returns elsewhere.

On Tuesday it slipped against major currencies as some market players booked profits on the recent surge.

Government efforts to stabilize financial markets have provided little respite, with the Nikkei stock average sliding below 7,000 to hit a 26-year intraday low on Tuesday.

Yosano echoed the concern that the Group of Seven rich nations voiced on Monday that the yen's wild swings threatened financial stability. 

"The yen's rise in the past week is astonishing, but it does not reflect Japan's economic fundamentals. It was caused by unwinding of yen carry trades and selling by investment funds," Yosano told a news conference after a cabinet meeting. "The G7 would take the same stance if any other currency showed such excessive moves," he said.

On speculation about a possible rate cut by the Bank of Japan, which holds a rate-setting meeting on Friday, Yosano said any such move would not help the economy.

"It may be an important proof of international cooperation if Japan lowers rates when other central banks cut them," Yosano said. "But when you think about the real economy, I don't think a rate cut to 0.25 percent from 0.5 percent would suddenly reverse the flow of money or boost corporate appetite for capital spending," he said.

The BOJ is widely expected to keep its key policy rate unchanged at 0.5 percent at Friday's meeting and revise down its economic forecasts in a semi-annual economic and price outlook report.

Central banks around the world repeatedly pumped billions of dollars into money markets and earlier this month several of them cut interest rates in an unprecedented co-ordinated move to contain the damage from a credit rout set off by the U.S. subprime meltdown 15 months ago.

But the BOJ opted out of coordinated rate cuts by the world's major central banks, saying that rates in Japan were already very low.

Copyright 2008 Reuters. Click for restrictions.