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BOJ Should Use Unsterilized Yen Sales, Barclays Says

Japanese authorities can boost the effectiveness of currency market intervention by leaving extra liquidity in the financial system after selling the yen, according to Barclays Bank Plc.

The yen’s climb to a 15-year high against the dollar last month has put pressure on the central bank to weaken the currency to preserve Japan’s export-led recovery. The Bank of Japan should make sure it uses “unsterilized” operations, whereby it leaves excess funds in the market instead of draining them through bill sales, said Masafumi Yamamoto, chief currency strategist at Barclays in Tokyo.

“That way, the bank will be able to impress the market it’s carrying out intervention and monetary easing at the same time,” Yamamoto said.

Global risk aversion this year has driven gains in the yen, which hurts exporters by making their goods more expensive in overseas markets. The yen reached 83.60 per dollar on Aug. 24, the strongest since June 1995, while the Nikkei 225 Stock Average has fallen 21 percent from its peak this year, meeting one definition of a bear market.

In efforts to spur the economy, the central bank boosted a bank-loan program by 10 trillion yen ($118 billion) to a total of 30 trillion yen on Aug. 30, while the government unveiled a 920 billion yen stimulus package.

‘Bold Action’

Japan hasn’t intervened in the currency market since March 2004, when the yen was at about 109 per dollar. The Bank of Japan sold 14.8 trillion yen in the first three months of 2004, after record sales of 20.4 trillion yen in 2003. The action failed to keep the currency from rising to 102.63 to the dollar by the end of that year.

Intervention will likely occur if the yen rises to 82-83 per dollar, said Taisuke Tanaka, a foreign-exchange strategist at Nomura Securities Co. The currency traded at 84.21 to the dollar as of 2:48 p.m. in Tokyo.

Prime Minister Naoto Kan and Finance Minister Yoshihiko Noda said they are ready to take “bold action” if necessary. Japanese Vice Finance Minister Motohisa Ikeda said on Aug. 31 that any currency intervention by government needs to be unsterilized in order to be successful.

The Bank of Japan’s independence may be called into question if it carries out unsterilized intervention under government pressure, said Barclays’ Yamamoto, who worked at the BOJ from 1995-2005.

“If it silently obeys in leaving excess funds in the market after intervention, it’s hard to call that a normal relationship between a government and central bank,” he said. “The BOJ would try to avoid that kind of situation.”

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