Japan Is Close to Intervening to Stem Yen's Rise, Macquarie's Jerram Says

Japanese authorities are “close” to stepping into the currency market to stem the yen’s advance and aid the nation’s exporters, though such a move may have limited effect, Macquarie Research said.

“Japan is close to foreign-exchange intervention, with the pain threshold probably between 80 to 85 per dollar,” wrote Richard Jerram, head of Asian economics at Macquarie in Tokyo. “We would expect the Bank of Japan to accommodate any intervention with a parallel expansion of its balance sheet, but it is far from clear that even this would be effective.”

Policy makers recognize the recovery is being led by exporters who need the yen to be at “a level that maintains an adequate level of competitiveness,” Jerram wrote in a report dated yesterday. Officials including Trade Minister Masayuki Naoshima this week expressed concern at the currency’s gains, while Bank of Japan Deputy Governor Hirohide Yamaguchi said it’s too early to determine the impact on corporate sentiment.

The yen headed for a weekly loss against the dollar and the euro on speculation Japanese policy makers will seek to weaken the currency. It traded at 86.77 per dollar at 11:09 a.m. in Tokyo. Japan’s currency has climbed 8.3 percent against the dollar and 12 percent per euro in the past three months, threatening to erode exporters’ profits earned abroad.

Jerram said there were two reasons why intervention probably wouldn’t be effective “in anything other than the short term.”

Different From Before

First, unlike when Japanese authorities most recently sold the yen in 2003-04, other central banks have near-zero interest rates and have been pumping cash into the financial system.

“More subjective perceptions on the likely duration” of those monetary policies are becoming important, Jerram said. “It is possible for the BOJ to intervene and expand its balance sheet without necessarily changing those perceptions.”

Second, Japan’s real effective exchange rate is only slightly below its long-term average, he said.

The International Monetary Fund said this month that the yen’s current value is “consistent with medium-term fundamentals,” and the effective exchange rate was “estimated close to its medium-term equilibrium value” as of March.

“We want to avoid excessive gains in the yen,” Vice Finance Minister Motohisa Ikeda told reporters yesterday, referring to the government’s economic growth strategy released last month. Trade Minister Naoshima said on July 21 that the currency’s gains pose a risk to the export-led expansion.

In contrast, Yamaguchi said that while financial markets have become more volatile, the central bank won’t be compelled to act based on a specific exchange-rate level.

He said business confidence has “improved considerably” and the threat of a double-dip recession has diminished since the central bank unveiled a bank-loan program at an emergency meeting on Dec. 1, days after the yen climbed to a 14-year high of 84.83 against the dollar. It doubled the facility to 20 trillion yen ($230 billion) in March.

To contact the reporter on this story: Russell Ward in Tokyo at rward16@bloomberg.net

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