Japan May Prepare Sustained Intervention Effort as Noda’s Agenda at Risk
Japan’s government signaled it is prepared for sustained intervention to ward off speculators from yen purchases after currency appreciation forced companies from Panasonic Corp. (6752) to Honda Motor Co. to lower earnings forecasts.
Finance Minister Jun Azumi said in Tokyo he will “continue to intervene until I am satisfied,” after yen sales yesterday that Credit Suisse Group AG analysts estimated may have exceeded $50 billion. The intervention was the first since August, when Japan spent 4.51 trillion yen ($57 billion) seeking to stem the currency’s surge to a postwar high against the dollar.
The effort showed support by Prime Minister Yoshihiko Noda for exporters seeing a loss in competitiveness after the yen rose 15 percent against the dollar and 21 percent versus the euro the past two years. With Nissan Motor Co. Chief Executive Officer Carlos Ghosn warning last month about a hollowing out of industry, lack of action risked undermining Noda’s agenda, said Hideo Kumano, an economist at Dai-Ichi Life Research Institute.
“Noda will encounter difficulty in gaining support for his budget package and participation in the Trans-Pacific Partnership,” if the yen’s exchange rate provokes a wave of corporate complaints, said Tokyo-based Kumano, who previously worked at the Bank of Japan. Noda has placed a priority on a third package of reconstruction spending from the aftermath of the March earthquake and tsunami, and on considering joining the TPP forum of trade talks with the U.S.
Impact of Sales
Yesterday’s sales spurred the biggest intraday drop in the yen against the dollar since October 2008. It sank 2.9 percent in New York after reaching a low of 79.53 earlier and also declined 1.9 percent versus the euro, to 109.33. The Japanese currency traded at 78.13 per dollar and 107.62 per euro at 4:53 p.m. in Tokyo today.
Japanese media speculated today that the intervention was bigger than the previous one, with the Asahi newspaper estimating sales of 10 trillion yen and the Yomiuri newspaper reporting intervention of 6 trillion yen.
Japan’s policy makers gave no indication of a Swiss-style target for their currency. Like Japan, Switzerland has seen its exchange rate appreciate as investors sought a haven from the euro-region’s debt crisis and from a U.S. economy burdened by the wreckage of a housing-market collapse. Swiss officials put a floor on the euro versus the franc and pledged to defend it.
“A Japanese floor would create a powerful precedent for the rest of Asia, something both the U.S. and Europe are loath to see,” Credit Suisse strategists led by Ray Farris in Singapore wrote in a note to clients. American policy makers have sought to persuade China, which manages its exchange rate, to allow greater appreciation against the dollar.
Rather than a target for the yen, Japanese policy makers have indicated they are concerned about any speculative trading that causes sharp, one-sided moves. A government official said on condition of anonymity that yesterday’s move was triggered by an abrupt climb in the yen in Sydney trading that was indicative of speculative activity. It reached a post-World War II high of 75.35 during Australian morning trading.
Azumi reiterated today that he is ready to take appropriate action in currency markets. He also said he will tell the G-20 that authorities acted because yen movements were straying from economic fundamentals. Noda said in Tokyo today that a 10 percent appreciation in the yen over a year may shave off about 0.19 percent from Japan’s gross domestic product.
While currency policy in Japan is set by the finance ministry, comments by Bank of Japan Governor Masaaki Shirakawa also indicated a more tactical than strategic approach toward the yen. He told reporters in Osaka yesterday that it isn’t really strong in nominal effective terms.
“Shirakawa’s remark that the yen is not particularly strong on a trade-weighted basis suggests little real enthusiasm at the central bank” for intervention, said Julian Jessop, chief global economist at Capital Economics Ltd. in London.
With the U.S. Federal Reserve and European Central Bank meeting this week to consider monetary stimulus, and no sign yet that the euro-region debt crisis is over, economic fundamentals argue in favor of continued yen strength, analysts said. Brown Brothers Harriman & Co. strategists predicted the currency will “retest levels near 76.”
European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo indicated disapproval of the yen sales, saying yesterday that “unilateral interventions neither have a lasting effect nor are they good from the point of view of global stability.”
Even so, Europeans may be loath to criticize Japan at the Group of 20 summit in Cannes, France, Nov. 3-4 given that they are seeking Asian contributions for an expanded rescue fund, UBS AG analysts said in a note.
For Noda, who took office in September, the yen’s surge risked distracting from his efforts to foster an economic rebound from three quarters of contraction, worsened by a record earthquake in the northeast that left about 19,000 people dead or missing and triggered a nuclear crisis.
Noda’s cabinet last month approved a 12.1 trillion yen spending plan to rebuild after the March disaster and to help companies cope with the currency. The package is subject to parliamentary approval.
Japan’s industrial output fell 4 percent in September from August, a sharper drop than analysts surveyed by Bloomberg News forecast. Export growth slowed to 2.4 percent from a year earlier in September from 2.8 percent in August, while retail sales also fell more than expected.
Stocks in Japan fell yesterday as Mitsui O.S.K. Lines Ltd. projected a loss and Fujifilm Holdings Corp. (4901) cut its profit forecast. Even after the intervention, which at one point during the day sparked a gain in the benchmark Nikkei 225 Stock Average of as much as 1.1 percent, the Nikkei closed down 0.7 percent. It finished 1.7 percent lower today.
Panasonic, the maker of Viera televisions, yesterday forecast a full-year loss of 420 billion yen, its biggest in a decade. It cited the impact of a stronger yen and one-time charges. Honda, Japan’s third-largest carmaker, reported second- quarter profit that missed analysts’ estimates as the strong yen eroded earnings.
“We’d like the government to do more intervention,” Yuji Isoda, manager of investor relations at Nippon Yusen K.K. told reporters in Tokyo yesterday. “Ideally we’d like the yen to weaken to around 85 yen to 90 yen against the dollar.”
Pressure may also rise on the central bank to do more, after it expanded planned government-bond purchases by 5 trillion yen last week.
“The root cause for yen appreciation is the Bank of Japan’s passive stance toward monetary policies, compared with the Federal Reserve,” said Atsushi Ito, a senior rate strategist in Tokyo at UBS AG.
Former Japanese Finance Ministry official Eisuke Sakakibara said earlier this month that intervention efforts by Japan will only be successful if coordinated with other nations. Sakakibara became known as “Mr. Yen” during his 1997-1999 tenure at the Ministry of Finance.
“The most we can expect is for intervention to slow the speed of the yen’s gains,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. In Tokyo and a former official in the BOJ’s foreign exchange division. “The government can’t keep intervening forever.”
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