Naoto Kan took less than 24 hours to deliver the “decisive action” he pledged during a fight to remain Japan’s prime minister, selling the yen to stem criticism his response to a slowing economic recovery was inadequate.
Kan yesterday authorized the government’s first currency intervention since 2004, reversing the yen’s march to a 15-year high. The action came a day after he defeated a leadership challenge from Democratic Party of Japan rival Ichiro Ozawa, who had pledged to weaken the yen.
“We’ll continue to take decisive measures when necessary,” Kan said today at a meeting of the Japan Chamber of Commerce and Industry. “If rapid yen movements hurt the desire of Japanese companies to invest at home, employment conditions will get worse.”
Kan’s victory over Ozawa brought political continuity to a country that has seen five prime ministers since September 2007. His immediate policy response suggests a renewed urgency to prevent a strong currency from undermining an economic recovery hampered by a dozen years of falling consumer prices.
“The debate with Ozawa may have honed Kan’s fighting spirit,” said Jesper Koll, Tokyo-based head of equity research at JPMorgan Chase & Co. “This hopefully signals the end of complacency, and the best sign of that is in the currency market, because Japan lives and dies with the yen.” The DPJ, which took power for the first time in September 2009, has struggled to meet campaign promises to improve social welfare without adding to the world’s largest public debt, which is approaching 200 percent of gross domestic product.
The yen dropped the most in nine months against the dollar after Japan sold its currency for the first time since March 2004. It fell below 85 per dollar, having earlier risen to 82.88, the strongest since May 1995. It was trading at 85.46 at 9:26 a.m. in Tokyo trading today.
Bonds surged the most in almost two years yesterday and the benchmark Nikkei 225 Stock Average jumped 2.3 percent on speculation the funds sold by the government will be used to buy Japanese securities. The Nikkei 225 extended its advance today, rising as much as 1.1 percent.
Finance Minister Yoshihiko Noda and Bank of Japan Governor Masaaki Shirakawa said the intervention was undertaken to stabilize the foreign exchange market. Kan as recently as Sept. 10 had said getting international cooperation in curbing the yen’s rise would be “difficult.”
Noda said the selling was unilateral and Chief Cabinet Secretary Yoshito Sengoku added that Japan was “seeking the understanding” of the U.S. and Europe.
“I was surprised Kan acted after he kept saying he’d take decisive measures without doing anything,” said Hideki Matsumura, senior economist at Japan Research Institute in Tokyo. “The government did this not because of the DPJ race but by looking at actual economic conditions and listening to requests from the business community.”
Kan defeated Ozawa, who heads the party’s largest faction, by a margin of 721 to 491 in a vote by party members, regional officials and national lawmakers. He received just six more votes from legislators than Ozawa, who entered the race after the prime minister refused to promote his supporters.
“There were concerns that Mr. Kan’s strong yen-deflation policies were weak,” said DPJ lawmaker Tsutomu Okubo, a former Morgan Stanley managing director who supported Ozawa in the leadership ballot. “Taking this action as he begins his second administration is appreciated.”
DPJ policy makers will meet today with central bank and finance ministry officials to discuss the intervention, he said.
Kan’s 920 billion yen ($10.8 billion) stimulus plan is less than half the amount Ozawa proposed, reflecting his commitment to fiscal discipline. Consumer confidence fell to a four-month low in August, while the yen’s advance threatened export earnings at companies led by Toyota Motor Corp. and Sony Corp.
The economy expanded at a 1.5 percent annual rate in the second quarter of the year, less than half the 5 percent growth between January and March.
The leadership fight came three months after Kan succeeded Yukio Hatoyama as prime minister and a year since the DPJ ousted the Liberal Democratic Party from half a century of almost unbroken rule.
JPMorgan’s Koll said Kan now must demonstrate he can follow through on those pledges, cut corporate taxes and push the central bank to boost the economy while ending the revolving door of prime ministers.
“The biggest challenge for Kan is overall policy consistency along with regime certainty,” Koll said. “Only then will entrepreneurs invest and hire workers.”