Japan Conditions US and EU for Intervention

Japan has been conditioning the US and Europe for Tokyo’s potential intervention against the rising yen, according to Naoto Kan, prime minister.

Japan prime minister Naoto Kan
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Japan prime minister Naoto Kan

Mr Kan’s leadership of the Democratic Party of Japan, and thus the prime ministership, is being challenged by Ichiro Ozawa. The strength of the yen, which hit a fresh 15-year high against the dollar this week, has become a central theme in the party election to be held on Tuesday.

Speaking on Friday in a debate with Mr Ozawa, Mr Kan said, “We are doing various things so that the US and Europe won’t respond negatively if Japan takes some sort of action.”

The focus on the yen in the tightly fought party race has led to rising expectations that Tokyo could intervene for the first time since 2004, with one analyst seeing the potential for Mr Kan to give the go-ahead as early as Monday in a bid to show leadership.

Mr Ozawa reiterated in the debate his view that Japan should strongly express its readiness to intervene in the markets. Mr Kan indicated that coordinated intervention would be difficult given that both the US and Europe want their currencies remain weaker to help exports.

The yen weakened slightly against the dollar after the prime minister’s comments, but afterward retraced its ground, trading at Y83.95 as of early evening in Tokyo.

Mr Kan’s comments came after fresh data showed that Japanese economic output expanded more than initially thought in the second quarter, but the revision was too small to reclaim the title of world’s second-largest economy from China.

The new data showed that capital spending contributed more to growth than preliminary estimates showed.

The upward revision still shows that the economic recovery has been slowing and remains almost completely reliant on exports, as consumer spending contributed nothing to growth. The contribution from capital spending doubled to 0.2 percentage points from the previous quarter.

Tokyo remains keen to prod consumer spending. Mr Kan earlier in the day announced details of a Y920bn ($11 billion) stimulus package. Almost half the figure will go toward sales incentives for appliances and housing.

The revised figures published by the government showed the economy grew a seasonally adjusted 0.4 per cent in the April-June quarter from the quarter before. That compared with a preliminary growth figure of 0.1 per cent.

On an annualised basis, the economy grew at a 1.5 per cent pace.

The cabinet office put Japan’s revised second-quarter nominal gross domestic product at $1,295 billion based on the average exchange rate during the quarter. China’s was $1,337 billion.

While the yen’s recent rise is likely to impact third-quarter comparisons, Chinese total output still appears on track to officially overtake that of its neighbour for the year. Japan’s per capita GDP, however, remains more than 10 times larger than China’s $3,600.

Japan’s preliminary GDP figures are published in advance of key capital spending and inventory data that can cause sharp revisions in the numbers. Japan is also notorious for repeated revisions to previously published data.

Economists are yet to be convinced that the improved capital spending figures mark a turning point in company investment, particularly given business and investor worries about the impact of the yen’s rise on earnings in the second half.