Japan may intervene in the foreign- exchange market for a second day to stem the yen’s gain to a 15- year high against the dollar and protect its exporters.
Japan yesterday unilaterally sold the yen against the dollar for the first time since 2004. Chief Cabinet Secretary Yoshito Sengoku said the finance ministry “seems to think” 82 yen per dollar to be the line of defense, after it reached 82.88 yesterday. Government officials speaking on condition of anonymity have previously said volatility was a bigger concern than the level. Officials said Japan may continue selling the yen in the U.S. and into today’s Tokyo trading if needed.
Prime Minister Naoto Kan was under pressure from business leaders to stop the yen’s gains from undermining the exports propelling Japan’s growth. It may do little for the economy because Japan alone won’t be able to keep the yen from rising, said analyst Tohru Sasaki.
“In the medium-term it can’t change the overall direction” of the yen, said Sasaki, head of Japan rates and foreign-exchange research in Tokyo at JPMorgan Chase & Co., who said before the move that he saw a bigger chance of intervention after Kan’s reelection as head of Japan’s ruling party.
The currency had risen more than 11 percent from mid-May until before the intervention. The yen slid 3.1 percent to 85.71 per dollar at 4:27 p.m. yesterday in New York, after touching 85.78, the biggest drop since October 2008. The benchmark Nikkei 225 Stock Average jumped 2.3 percent yesterday to 9,516.56.
Japanese banks are buying dollars in the U.S. market, a sign they could be acting on behalf of the Bank of Japan and helping continue the central bank’s earlier intervention, according to Tim O’Sullivan, chief trader at FOREX.com, a unit of the online currency trading company Gain Capital in Bedminster, New Jersey.
“It’s a pretty safe bet that some of these banks are acting on the Bank of Japan’s request,” O’Sullivan said.
The yen reached a level against the dollar “we couldn’t ignore,” Kan told reporters in Tokyo yesterday, adding that he will continue to watch the currency closely.
Japan’s currency has rallied amid concern about the durability of the U.S. recovery and the effect of Europe’s debt woes. The yen typically gains when investors avoid risk because of the country’s current-account surplus and deflation.
Authorities decided to intervene yesterday because the yen’s climb beforehand was due to traders’ views that Kan wouldn’t take such a step, said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. Kan’s opponent to head the Democratic Party of Japan, former DPJ chief Ichiro Ozawa, had specifically called for yen sales.
It was incorrect for observers to judge that chances for intervention receded with Kan’s reelection, a government official told reporters on condition of anonymity. The official also said yesterday’s yen sales were very large, without specifying a total, and traders were probably thinking intervention would come at 80 per dollar, so the step came as a surprise.
“Investors were starting to doubt the government’s commitment to its pledge that it would take bold action,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. Kan and Finance Minister Yoshihiko Noda in recent weeks repeatedly said that Japan was ready to take “bold” measures to stem the currency.
The Japanese government official said European and U.S. officials were informed of the move in an effort to avoid a negative reaction. It took a while to convince Europe because authorities there didn’t like the idea, the person said.
Declined to Comment
U.S. Treasury spokeswoman Natalie Wyeth declined to comment on Japan’s announcement when reached by telephone. China’s central bank declined to comment, as did spokespeople for the Canadian finance ministry and central bank, U.K. Treasury and European Central Bank.
Japan’s central bank sought to strengthen the impact of the action by leaving the extra yen in the financial system. The BOJ historically would mop up the extra funds by selling domestic securities.
“The BOJ will provide abundant liquidity to the financial market by utilizing the funds injected by intervention,” Bank of Japan board member Tadao Noda said at a press conference in Shimonoseki, western Japan yesterday. The finance ministry makes the decision on currency interventions, with the central bank carrying out the operation.
Until now, the government has pressed the Bank of Japan to step up liquidity injections to help address the gains in the yen. The central bank last month increased a credit program by 10 trillion yen ($119 billion) after an emergency meeting. The step had little impact on the currency.
Top business executives have been calling for government action to stem the yen’s rise.
“We want verbal or actual intervention if the yen appreciates more than the current level,” Hiromasa Yonekura, head of Japan’s Keidanren business lobby, said at a Sept. 13 press conference. “Rapid change should be managed,” Hiroaki Nakanishi, president of Hitachi Ltd., said this week in Tokyo.
Some analysts have said that official action by Japan might not weaken the yen for long unless it’s conducted together with overseas authorities. Kan said last week in a debate with Ozawa that getting international cooperation to halt the yen’s rise is “difficult.”
It’s “pretty unlikely” officials will be able to return the yen to the level “that companies are basing their profit forecasts” on, Nishioka at RBS Securities said. Firms said they remain profitable as long as the yen trades at 92.90 per dollar or weaker, according to the Cabinet Office’s annual report released in February.
For China, Japan’s decision is a “favorable development,” because it adds another country to the list of those intervening, said Tomo Kinoshita, co-head of Asia Economic Research at Nomura Holdings Inc. in Hong Kong. China has limited gains of its own currency to less than 2 percent since ending a two-year peg to the dollar in June.
Japan hadn’t intervened to sell yen in the foreign-exchange market since 2004, when the yen was around 109 per dollar. The Bank of Japan, acting on behest of the Ministry of Finance, sold 14.8 trillion yen in the first three months of 2004, after record sales of 20.4 trillion yen in 2003.
“We can’t overlook these movements that could have a negative effect on the stability of the economy,” Finance Minister Noda said today. “We conducted intervention to contain excessive movements in the currency market. We will continue to watch developments in the market carefully and we will take bold actions including further intervention if necessary.”
Bank of Japan Governor Masaaki Shirakawa said in a statement that the action should “contribute to a stable foreign exchange-rate formation.”
U.S. Treasury Secretary Timothy F. Geithner declined to comment about the prospects for currency intervention in an interview last week, instead saying that Japanese officials should do what they can to help their economy grow.
“They’re working through some difficult problems,” Geithner said on Bloomberg Television. “My view is they should be focusing like we are on how to make sure they’re reinforcing recovery in Japan and doing things that are going to help.”
Recent Japanese data have pointed to the expansion losing momentum. The government this week revised its July industrial output figures to show that production fell rather than increased from a month earlier. Japan’s economy expanded at a 1.5 percent annual rate in the second quarter, less than half the pace of the previous period, and consumer confidence slid to a four-month low in August.