Bernanke Shadow of Easing Limits BOJ Success With Yen Weakness
Japan said two days ago it sold yen for the first time since 2004 because the currency’s surge to a 15-year high versus the dollar imperiled the nation’s export-led recovery. Meantime, pressure is growing on U.S. Federal Reserve Chairman Bernanke to print more dollars to bolster America’s flagging economy, a policy that contributed to a weaker greenback in 2009.
“Because of speculation of further monetary easing by the Fed, it may be impossible for Japan alone to turn around the yen-appreciation trend” through unilateral currency intervention, said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. The firm is a unit of Japan’s third-largest banking group.
Governments around the world are counting on relatively weak currencies to help bolster exports and keep their own economic recoveries afloat. Recent developments indicate global growth “has slowed somewhat,” John Lipsky, the second-highest ranking official of the International Monetary Fund, said in a Sept. 15 speech in New York.
Japan’s move, which sent it down 3.3 percent against the dollar and 3.4 percent versus the euro, drew a rebuke from Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro-region finance ministers.
Juncker said in an interview in Brussels yesterday that the group was “insisting” Japanese authorities “step back from unilateral interventions.” His comments came the same day the European Union’s statistics office said the region’s exports fell in July for the first time in three months.
“Very few countries right now want a strong currency,” Ray Farris, the London-based head of foreign-exchange strategy at Credit Suisse Group AG, said in an interview in Tokyo. “The U.S. might talk about having strong currency policy, but reality is that the U.S. government, President Obama in particular, has made it clear that he sees export growth as part of the adjustment process in the United States.”
Barack Obama’s administration formed the Export Council in March with the goal of doubling U.S. exports to about $3.1 trillion by 2015, supporting 2 million additional jobs.
“The more American companies export, the more they produce,” Obama said yesterday after meeting with the group at the White House. “And the more they produce, the more people they hire and that means more jobs -- good jobs that often pay as much as 15 percent more than average.”
Japanese Finance Minister Yoshihiko Noda defended his decision to intervene in currency markets after the move spurred criticism from policy makers in the U.S. and Europe.
“I’m aware of the various comments, but with deflation, our economy is in a severe situation and it’s undesirable that the strong yen be prolonged,” Noda said today. “I think it’s important to explain that persistently to other nations.”
Growth in Japan’s economy slowed to a 1.5 percent annual pace last quarter, from 5 percent in the first three months of the year. Consumer confidence reached a four-month low in August, and the government this week revised its July industrial output figures to show that production fell rather than gained.
Trade accounted for more than half of Japan’s expansion 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 currency strengthened to 82.88 to the dollar, the strongest since May 1995, before the BOJ stepped into the foreign-exchange market by purchasing and selling currencies to influence prices. A day earlier, Prime Minister Naoto Kan won re-election as head of the ruling party, beating a challenger who had insisted intervention was necessary. The yen traded at 85.79 at 11:54 a.m. in Tokyo today.
“I’m guessing the Bank of Japan is being defensive, rather than offensive,” said Derek Halpenny, the European head of global currency research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “Japan is in dire straits in terms of trying to get sustainable growth going again and getting rid of deflation, and having a stronger currency in nominal terms is deflationary. That’s the policy incentive to what they’ve done.”
The Fed is also trying to avoid deflation. U.S. consumer prices, excluding food and energy, rose 0.9 percent in July from a year earlier, the smallest increase in four decades.
New York-based Goldman Sachs Group Inc., the most profitable securities firm, and Newport Beach, California-based Pacific Investment Management Co., manager of the world’s biggest bond fund, both predict the Fed will drive down borrowing costs by purchasing more fixed-income securities. The move, known as quantitative easing, pumps cash into the economy.
“While the intervention has been effective in the near term, the direction of dollar-yen is ultimately dependent on U.S. yields, which remain under downward pressure and are continuing to weigh on the greenback,” said David Forrester, a currency economist at Barclays Plc in Singapore.
The Fed bought more than $1.7 trillion in housing debt and Treasury securities last year, contributing to a 10.2 percent drop in the dollar, according to Bloomberg Correlation-Weighted Currency Indexes. The central bank said last month it would reinvest the proceeds from its holdings of mortgage-backed securities into Treasuries.
“Should further action prove necessary, policy options are available to provide additional stimulus,” Bernanke said at a gathering of central bank officials and economists in Jackson Hole, Wyoming, on Aug. 27.
Further Fed purchases won’t be a key determinant of the exchange rate between Japan and the U.S., according to economists Carl Weinberg of High Frequency Economics and Barry Eichengreen at the University of California at Berkeley.
“I have to say that loose monetary policies are not what’s driving the currency any place in the world,” Weinberg, who is based in Valhalla, New York, said.
The economies of both Japan and the U.S. would benefit from another round of quantitative easing, said Eichengreen.
“People are viewing this as a conflict between the U.S. and Japan, but if our policy would otherwise push up the yen a little bit and thereby cause more deflation there, they can offset that by printing a few more yen, which again costs them nothing, has no negative side effects,” Eichengreen said. “I don’t see any incompatibility between the two policies.”
The Bank of Japan is scheduled to meet on monetary policy Oct. 4-5. They made an emergency decision on Aug. 30 to add 10 trillion yen ($116 billion) to a credit program, bringing it to 30 trillion yen. The bank kept the benchmark overnight lending rate at 0.1 percent and its monthly target for government bond purchases at 1.8 trillion yen.
Japan hadn’t intervened in the currency market since March 2004, when the yen traded at about 109 per dollar. The Bank of Japan, acting on behest of the Ministry of Finance, sold 14.8 trillion yen in the first three months of 2004 following 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.
Unilateral intervention by the Swiss National Bank couldn’t prevent the franc from appreciating to a record high against the euro this year and reaching parity with the dollar.
The Swiss franc strengthened to a record level of 1.2766 per euro on Sept. 9 after the Swiss National Bank abandoned attempts to weaken the currency. The franc and the yen tend to strengthen during periods of financial stress because their export-reliant economies don’t need foreign capital to balance current accounts -- the broadest measure of trade.
Exports accounted for more than half Switzerland’s gross domestic product last quarter, compared with 13 percent in the U.S., according to data compiled by Bloomberg.
The yen and franc appreciated the most on a relative basis after Fed efforts from December 2007 to March 2009 to jumpstart the economy expanded the central bank’s balance sheet by as much as $1.15 trillion, a Barclays analysis of 17 exchange-rate pairs shows.
The study examined currency responses to Fed decisions as a means of assessing the likely reaction to quantitative easing. They found the yen and franc tended to outperform before and after the decisions. Emerging-market currencies did worse.
The yen rallied as much as 14 percent against the dollar in the nine months following the Fed’s announcement of quantitative easing on March 18, 2009. The biggest loser was the greenback. The Dollar Index, a gauge of the currency against the euro, yen, pound, franc, Swedish krona and Canadian dollar, weakened as much as 15 percent.
Japan runs the risk of being ostracized by other governments if it continues to intervene, similar to the criticism China has drawn for not allowing its currency to strengthen at a faster pace, according to Mitsuru Saito, the chief economist at Tokai Tokyo Securities Co.
“It may bear the brunt of international criticism and risks being named a currency manipulator, just as China has been labeled,” Saito said. “Japan’s solo intervention isn’t a quick-fix for the economy, and its effect on the market can easily be wiped out by additional easing from the Fed, which seems to be preparing for it.”