Japan Dusts Off Mr. Yen’s Toolkit as Recovery Endangered
Japan escalated its campaign to convince investors that the nation’s post-earthquake challenges mean they shouldn’t pile into the yen as a haven from the turmoil over U.S. and European debt.
On his third day in the job, Takehiko Nakao, vice finance minister for international affairs, oversaw currency sales that sent the yen down the most against the dollar since September; it recouped some of the loss today. With Nakao’s boss Yoshihiko Noda this week referring to mid-1990s style intervention as a useful reference, investors may need to brace for further action, according to Gareth Berry, a strategist at UBS AG in Singapore.
The risk is policy makers take their eye off the broader measures more likely to bolster prospects for a rebound from an estimated three straight quarters of economic contraction. Prime Minister Naoto Kan and opposition lawmakers have yet to forge a path toward passage of a reconstruction bill that would redress the 16.9 trillion yen ($212 billion) of damage from March 11.
“Japan needs to improve its responsiveness to the earthquake disaster -- the political situation is in a stalemate,” said Tomo Kinoshita, a Hong Kong-based economist at Nomura Holdings Inc., Japan’s largest securities company. “Unilateral intervention has its limits.”
The yen was at 78.51 per dollar as of 12:39 p.m. in London, after losing 2.3 percent yesterday. It traded as strong as 76.30 Aug. 1, nearing the postwar high of 76.25 reached in March after the earthquake and tsunami.
The currency briefly traded weaker than 79 in the afternoon, a jump that a government official speaking to reporters in Tokyo declined to comment on. The benchmark Nikkei 225 (NKY) Stock Average was down 3.7 percent today after a rout in U.S. and European shares overnight.
Japan may have spent a record intervention amount of about 4.5 trillion yen in yesterday’s intervention, based on projections of deposits held by financial institutions at the Bank of Japan, according to Yuichi Takahashi, market economist at Totan Research Co., a money-market brokerage.
“We intervened to restrain speculative and disorderly movements -- it wasn’t targeted at a level,” Noda told reporters in Tokyo today, adding that officials will continue to take “appropriate” measures when necessary. “We must closely watch the currency market, but with the big drops in the Dow, I’d like to closely monitor the stock market today as well.”
The move was a surprise because it preceded today’s U.S. unemployment report, next week’s Federal Reserve policy meeting and Standard & Poor’s decision whether to cut the AAA American sovereign-debt grade -- all of which pose risks for the currency market, Masafumi Yamamoto, chief currency strategist in Tokyo at Barclays Capital, wrote in a note. The timing “suggests that the MOF intends to take action repeatedly,” he wrote.
Nakao, 55, took the role made famous by Eisuke Sakakibara this week and the personnel change may augur a shift in approach toward yen sales, according to Berry at UBS. Sakakibara, who was vice finance minister from 1997 to 1999, became known as Mr. Yen for his attempts to influence the foreign-exchange market. Nakao replaced Rintaro Tamaki, who is moving to the Organization for Economic Cooperation and Development in Paris.
Hiroshi Watanabe brought an end to a record tally of interventions when he took the job in 2004, ushering a six-year hiatus that ended in September 2010. That month, officials implemented a single bout of sales to counter speculation that incoming Prime Minister Kan was less likely to embrace intervention than his main rival.
Japan acted again March 17 in a coordinated move with the Group of Seven, then stayed out of the market, finance ministry data show.
“Events could unfold quite differently this time,” Berry wrote in a note to clients yesterday. After Noda commented on measures taken in 1995 earlier this week, which involved sometimes-daily interventions, “investors should probably brace themselves for more of the same,” he wrote.
Responding to a lawmaker who discussed the effectiveness of a series of efforts -- including intervention and Bank of Japan monetary easing -- to weaken the yen in 1995, Noda said Aug. 3 that that example of a coordinated approach serves as a useful reference for the challenges the country faces today.
Corporate leaders advocated a sustained effort to halt the yen’s gains, which threaten to undermine exporters’ earnings and force manufacturers to move factory jobs abroad.
“The current exchange rate is at a level that has an extremely damaging effect on the Japanese economy -- I welcome today’s intervention, but the resulting exchange rate won’t be at an acceptable level post-intervention,” Mitsubishi Motors Corp. President Osamu Masuko said in an e-mailed response to questions yesterday. “The yen will continue to be strong, and we ask for appropriate measures to be taken quickly.”
Andre Hoffmann, president for L’Occitane’s Asia Pacific business, said the strong yen benefits the company because its earnings are in euros. Japan accounts for about a quarter of its global sales.
“We’re still growing our business in Japan,” he said in an interview. In the longer term, an appreciating yen “is a very unhealthy situation,” he said.
The Bank of Japan added 10 trillion yen of monetary stimulus measures yesterday, including a 5 trillion yen expansion of an asset-purchase fund that’s mainly government debt, and a similar widening of a program aimed at encouraging banks to lend. Together with a 5 trillion yen injection mounted in March, the BOJ’s steps still add up to less than the Fed’s $300 billion in asset purchases known as QE2.
Even as he unveiled the measures, BOJ Governor Masaaki Shirakawa reiterated his warnings against more radical measures favored by some lawmakers. Any move by the central bank to directly underwrite government spending would be “extremely inappropriate,” he told reporters. Shirakawa has previously warned against a reemergence of asset bubbles, which last afflicted Japan in the late 1980s, and said that direct debt underwriting could cause inflation to climb.
“The BOJ’s ultimate intention is at all times is to prevent an inflationary overshoot and asset price bubble -- and that condemns them to permanent deflation,” said Richard Jerram, chief economist at Bank of Singapore who has analyzed Asian economies for two decades.
Japanese consumer prices have yet to post sustained gains after deflation took hold in the late 1990s in the aftermath of the 1990 stock-market bubble bursting and 1998 banking crisis.
The country’s immediate challenge is restoring growth after the March 11 disaster that left more than 20,000 people dead or missing, shuttered factories and devastated towns in the northeast. Kan has implemented two supplementary budgets totaling 6 trillion yen to contend with spending needs including emergency housing for the displaced. A third package may come in at 10 trillion yen, ruling party officials have said.
Opposition lawmakers have demanded that Kan resign before considering the reconstruction bill, blaming him for showing insufficient leadership after the quake. Kan has declined to specify a departure date.
The government is postponing the compiling of next year’s budget by a month to focus on reconstruction efforts, Noda told reporters in Tokyo today. The finance ministry usually accepts spending requests from other agencies in August.
Economists are counting on the rebuilding to turn the economy around in the second half of the year. Gross domestic product contracted at a 2.6 percent annual pace in the second quarter, a government report may show Aug. 15, according to the median estimate in a Bloomberg News survey.
“Today’s monetary easing and intervention are just like morphine,” Masamichi Adachi, senior economist at JPMorgan Chase & Co. and a former Bank of Japan official said yesterday. “They provide temporary effects but they don’t solve the essential problems of Japan’s economy.”
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