Japan’s Move on Yen Lacks Global Support

Hiroko Tabuchi|The New York Times

Japan’s decision to intervene in currency markets to weaken the yen and shore up its export-driven economy could be only the first step in a long battle — one made more difficult because Japan, unable to find support among its trading partners, must go it alone.

Japanese Yen
Photo by: Jesse Braun

Japan moved Wednesday to prop up the United States dollar and weaken the yen, directly manipulating its currency for the first time since 2004. Japanese monetary authorities appeared to have bought dollars and sold yen. That move started a wider market rally that sent the dollar up by about 2.55 percent for the day, to 85.62 yen.

The maneuver by Japan’s finance ministry came after the yen had reached 15-year highs in recent weeks, elevated by its status as a haven among risk-averse global investors. The strong yen has hampered Japan’s recovery from last year’s severe recession by weighing on the competitiveness of its exports, which account for a bulk of the nation’s economic growth.

“We conducted a currency intervention to check excessive volatility in currency markets,” Yoshihiko Noda, the finance minister, said Wednesday. “We will continue to watch currency market moves and take decisive steps if necessary, including intervention.”

It is unlikely, though, that intervention by Japan alone will sway currency markets in the long term. The global volume of foreign exchange trading has grown rapidly in recent years, which prevents intervention by a single government from countering bigger market trends.

Other countries are unlikely to help Japan’s cause, because they need to keep their own currencies weaker to bolster exports. A weak currency makes a country’s exports more competitive and increases the value of overseas earnings.

Much of the yen’s weakening came from investors selling the currency on expectations that the Japanese government would be more active in keeping the yen in check. Japan did not disclose how much it had spent in currency transactions, but dealers put the initial amount at 300 billion to 500 billion yen ($3.5 billion to $5.8 billion).

But as Switzerland found this year, a single government’s efforts to weaken its currency can prove futile. Switzerland abandoned that effort, after its central bank had lost more than 14 billion Swiss francs ($14 billion) in foreign currency holdings in the first half of the year, after a fall in the euro’s value ate into the bank’s reserves.

The Swiss franc is also seen by investors as a relative haven and has also strengthened amid global financial unrest. This month, the franc hit a record high against the euro.

“The Japanese authorities need to be aggressive now and hit the market hard, fast and furious, because as time goes on, the announcement effect will dissipate,” David Bloom, global head of FX Strategy Research, said in a report to clients Wednesday. “For this to actually work, what is needed is global cooperation.”

The biggest question is whether the scale of the intervention will grow and lead Japan into a quagmire or whether the yen will weaken enough for Japan to go back to a wait-and-see stance.
NLI Research Institute
Yasuhide Yajima

The intervention by Japan runs counter to a recent trend among the world’s major economies to stay away from market manipulation and let markets decide the strength of their currencies. The United States, for example, has pressured China to stop keeping its currency, the renminbi, artificially weak against the dollar.

Japan’s move came after Prime Minister Naoto Kan’s victory over a challenger in a partywide ballot on Tuesday. Analysts had initially predicted that the victory by Mr. Kan, who had been less explicit about the need for intervention than his rival, Ichiro Ozawa, would probably not lead to action in currency markets.

Mr. Kan had initially been cautious on outright intervention, opting instead to issue statements hinting at some sort of government action in an attempt to talk down the yen. But Wednesday’s action reflected the intense pressure on the prime minister to take more drastic action.

Yoshito Sengoku, the government’s top spokesman, indicated Wednesday that the finance ministry — which orchestrated the intervention — considers 82 yen to the dollar a benchmark in deciding whether to intervene in markets. The exchange rate had recently neared that point.

He indicated Wednesday that Japanese currency officials were still trying to gauge the reaction of their counterparts in the United States and Europe to the intervention, but he did not disclose any details.

The European Central Bank had no comment on the intervention. European companies, especially German companies, have benefited from the weaker euro, which gives them an advantage over Japanese competitors in the machinery and auto industries.

Natalie Wyeth, a spokeswoman for the United States Treasury, declined to comment on Wednesday.

The intervention drew praise from Japanese exporters. The Nikkei 225 stock average rose 2.3 percent to close at 9,516.56 after losing as much as 1.1 percent earlier.

“We applaud the move by the government and the Bank of Japan to correct the yen’s strength,” Honda Motor, the No. 2 automaker in Japan after Toyota, said in a statement. Tokyo’s intervention would have more effect if the Japanese central bank followed with more monetary easing. Such a move would be meant to widen differentials between Japan’s rock-bottom interest rates and those of other countries, making holding the yen less attractive for investors and creating more downward pressure on the currency.

Lower interest rates worldwide since the financial crisis — particularly in the United States, which has engaged in its own rounds of monetary easing — have reduced the spread, or difference, between Japan’s interest rates and those elsewhere. That narrowed gap has changed the habits of investors who for years borrowed yen at low interest rates, then invested in higher-yielding currencies — a practice that helped to keep the yen weak for much of the last decade.

The Bank of Japan also faces the decision of whether to support the finance ministry’s move by letting the money released in the currency transactions continue to circulate — or whether to counter the move by absorbing the excess money that results from selling the yen. Such a countermove, a measure known as sterilization, would be help keep inflationary side effects in check.

But analysts said they expected the central bank to leave the money in circulation because Japan’s sluggish economy was mired in deflation, or the fall in prices, and that any inflation would in fact be a bonus.

And in a statement, Masaaki Shirakawa, the governor of the Bank of Japan, seemed to substantiate that expectation. He said the bank would pursue “strong monetary easing” and provide liquidity to financial markets.

The central bank, though, has been averse to what it sees as too much easing, and has been keen to assert its independence from the Japanese government, adding some uncertainty to how effective the intervention will be.

“The biggest question is whether the scale of the intervention will grow and lead Japan into a quagmire,” said Yasuhide Yajima, senior economist at the NLI Research Institute in Tokyo, “or whether the yen will weaken enough for Japan to go back to a wait-and-see stance.”