Japan Doesn’t Need Weaker Yen to Spur Recovery, Jefferies Says

Japanese policy makers shouldn’t try to weaken the yen as part of the effort to rebuild an economy shocked by the March 11 earthquake, tsunami and nuclear crisis, according to Jefferies & Co.

The Bank of Japan’s decision to add liquidity to the financial system and purchase risk assets to help bolster the economy is “probably” the right one, said Naomi Fink, a Tokyo-based macroeconomic strategist focusing on Japan for Jefferies. The moves may stimulate output and give the government leeway to temporarily raise taxes to fund its recovery efforts, she said.

While Japan is still very reliant on exports, much of the production capacity of its companies has migrated overseas, including 40 percent of its auto industry, Fink said during a conference call today. Global diversification may help buffer the nation from damages caused by the earthquake, tsunami and cutbacks in available power from the nuclear crisis.

“Massive intervention to weaken the yen would be the wrong thing to do,” Fink said. “Consumers are cash rich. If they are paying additional tax to pay for the necessary recovery while they have some asset inflation from the BOJ’s operations, they might not be too adverse to absorbing the price increases, which is reflationary, not deflationary.”

Yen Moves

The yen reached its strongest level since 1995 versus the dollar as risk of radiation leaks from crippled nuclear plants in Japan added to speculation insurers and investors will redeem overseas assets to pay for damages.

Japan’s currency gained for the fourth straight day, prompting speculation the BOJ may intervene for the first time since September in an effort to counter repatriation flows and shore up the competitiveness of Japanese companies. The yen gained as much as 1.2 percent to 79.76 per dollar, the strongest since April 1995, when it touched a post-World War II high of 79.75.

“Any time we see sell-Japan arguments and fears of fiscal crisis, a lot of this is likely to be overdone,” Fink said. “There probably is some reason to remain somewhat optimistic that households and commerce will be able to adjust relatively quickly” to restrictions on available electricity while many industries will be “surprisingly resourceful” in their approach to rebuilding, she said.

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