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Japan Officials Signal Rising Concern at Yen’s Gain

Japanese officials stepped up their concern about a rise in the yen that risks undermining exporters, the main source of the nation’s economic recovery.

“We want to avoid excessive gains in the yen,” Vice Finance Minister Motohisa Ikeda told reporters in Tokyo today, referring to the government’s economic growth strategy released last month. He spoke a day after Trade Minister Masayuki Naoshima said the currency’s gains pose a risk to the expansion.

Prime Minister Naoto Kan’s administration may press the Bank of Japan to provide additional monetary easing measures to stem the currency’s advance and support the recovery from the country’s worst postwar recession. The government may also consider additional economic stimulus, National Strategy Minister Satoshi Arai said yesterday, even as it pledges to pare budget spending and bond sales.

“The pressure for the BOJ is likely to strengthen” if the yen continues to significantly appreciate further, said Takuji Okubo, chief Japan economist at Societe Generale SA in Tokyo. “Government officials are indicating their willingness to do more for the economy to show their vigilance, but it’s unnecessary at this point as the recovery continues.”

The yen has climbed 8 percent against the dollar and 12 percent per euro in the past three months as concern about the global recovery boosted demand for the currency as a refuge. Its gains threaten exporters’ profit and competitiveness.

Seven-Month High

Japan’s currency approached a seven-month high against the dollar today after Federal Reserve Chairman Ben S. Bernanke said the U.S. economic outlook remains “unusually uncertain.” The yen traded at 86.56 per dollar at 5:12 p.m. in Tokyo and reached 86.27 on July 16, the highest level since Dec. 1.

That’s stronger than the 92.90 average breakeven point estimated by exporters. The Nikkei 225 Stock Average fell 0.6 percent today, with Canon Inc., a camera maker that gets about 80 percent of its sales outside Japan, dropping 0.8 percent.

Exporters have driven Japan’s expansion as household spending relies on government stimulus initiatives. The government yesterday maintained its view that the economy is “picking up steadily” while in a “difficult situation” because of factors including high unemployment.

Economy Minister Arai said at a briefing yesterday that he “can’t predict” what will happen when incentives to purchase cars and electronics expire later this year. “We will need to examine the overall state of the economy before deciding whether to implement any stimulus measures.”

Limited Room

The government’s room to do so is limited by its undertaking last month to cap annual spending at 71 trillion yen ($820 billion) and bond sales at 44.3 trillion yen over the next three years to contain the world’s biggest public debt.

Bank of Japan Deputy Governor Hirohide Yamaguchi said yesterday that financial-market volatility has increased, while adding the bank won’t be compelled to act based on a specific exchange-rate level. “It takes a certain period of time for us to judge the effect of the yen’s advance on corporate activities and sentiment,” he said in Toyama, central Japan.

He said business confidence has “improved considerably” and the threat of a double-dip recession has diminished since the central bank unveiled a 10 trillion yen 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. The central bank doubled the size of the facility in March.

Longer Loans

Okubo at Societe Generale said the central bank’s options include expanding the period of the loans under that program to six months from three months. He said the Finance Ministry is unlikely to ask the Bank of Japan to intervene to sell the yen because corporate sentiment is holding up.

Japanese authorities “would act more aggressively, perhaps with intervention, if the yen strengthens too rapidly,” said Greg Gibbs, a currency strategist at Royal Bank of Scotland Plc in Sydney. “But the trigger point appears to be somewhat lower, maybe below 85.”

The Bank of Japan hasn’t stepped into the currency market since it sold 14.8 trillion yen in the first three months of 2004. The yen has averaged 90.98 against the dollar in 2010, putting it on course for the strongest annual level against the greenback since currencies began trading freely in 1971, according to data compiled by Bloomberg.

Yamaguchi said the bank may explore further measures to help improve the country’s growth prospects on top of a 3 trillion yen program unveiled last month to encourage lending. Echoing remarks made by Governor Masaaki Shirakawa last week, he said upside and downside risks to the economy have been rising while the recovery is gradually spreading to households.

Figures over the past month show the expansion may be slowing. Export growth and industrial production moderated in May, while the jobless rate climbed to a five-month high and consumer prices continued falling.

“I don’t see a high chance of Japan’s recovery running out of breath,” said Societe Generale’s Okubo. “We just need to be careful about what’s coming out from overseas.”

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