Japan should not intervene in currency markets and is better served focusing on diversifying its economy, said Toyoo Gyohten, a former currency official.
Japan sold the yen this week for the first time since 2004 after the currency climbed to 82.88 per dollar, the strongest since May 1995. Finance Minister Yoshihiko Noda said today the government will continue to intervene if necessary.
“I personally would not support or agree with the policy of manipulating exchange rates through market intervention,” Gyohten, 79, said in Tokyo today at an event hosted by the Foreign Press Club of Japan. “Policies to prevent damage to the Japanese economy should be taken.”
While intervention can be effective when one-sided market psychology overwhelms economic fundamentals, Japan should focus on reducing its reliance on exports, Gyohten said. The government should use tax reform and deregulation to foster growth in the services industry, he said.
Trade accounted for more than half of Japan’s growth in the second quarter, highlighting the threat of a stronger yen. Japanese exporters said they can remain profitable as long as the yen trades at 92.90 per dollar or weaker, according to a Cabinet Office report released in February. The yen traded at 85.87 as of 5:59 p.m. in Tokyo.
Global risk aversion this year has driven gains in the yen, which tends to strengthen during economic turmoil as Japan’s trade surplus makes it less reliant on foreign capital. A stronger domestic currency hurts the overseas competitiveness of Japanese exporters.
Japan is recovering from its deepest postwar recession and last quarter lost the title of world’s second-largest economy to China. China will pass the U.S. within 20 years to take the No. 1 spot if it can keep up annual growth of 7 percent, Gyohten said.
Gyohten last year served as an adviser to former Finance Minister Hirohisa Fujii, who was succeeded by Naoto Kan, the current prime minister. Gyohten served as vice finance minister for international affairs from 1986 to 1989. In 1992, he co-authored “Changing Fortunes: The Shaping of the International Monetary Order” with former Federal Reserve Chairman Paul Volcker.