Commentary: How Japan Kept a Lid On the Yen

After a decade of anemic growth, an apparently endless banking crisis, and creeping deflation, Japanese economic officials have become the butt of more than a few jokes. But when Tokyo this year sensed the dollar's decline against major currencies, it didn't kid around with half-measures. The Bank of Japan stepped in with $50 billion in currency interventions, keeping the yen remarkably stable against the greenback.

Along the way, Japan's money mandarins have earned the grudging respect of currency traders in New York, Tokyo, and London, many of whom were betting that the yen would appreciate to crushing levels, throttle export growth, and push Japan back into recession. Despite the dollar's 11% plunge against the euro, the yen has barely budged. As of June 24, it stood at 118 to the buck -- just 1% stronger than it was in January.

Given Japan's dismal economy, no one was predicting a superpowered yen this year. But the surprising recovery of Japanese shares -- the Nikkei average is up 17% since April -- has attracted some $16 billion in foreign money to the Tokyo exchange in the past two months. Moreover, during the first two weeks of May, a wave of dollar-selling driven by record-low U.S. interest rates and slack economic growth pushed the yen up 3.6%, to about 115 -- the level at which Japanese exporters start to yelp about declining profits. "If the yen had popped up to 100 or so, you'd probably be looking at a recession by the end of the year," figures ING Baring Securities (Japan) Ltd. economist Richard Jerram.

With Japanese export growth the only thing keeping the economy afloat, Finance Minister Masajuro Shiokawa and Bank of Japan Governor Toshihiko Fukui decided to send a decisive message to currency traders: Bet long on the yen, and you'll get knee-capped. Fukui's currency team started buying greenbacks. The BOJ snapped up a cool $16 billion in the first quarter alone and recycled much of that into U.S. Treasury bonds to bolster the buck. And Japanese officials, normally tight-lipped on interventions, wanted to scare off any traders who might still be gambling on a surge in the yen. In April, the government blurted out exactly how much it had spent so far -- and promised much more to come.

Sensing a bluff, traders started buying. At the same time, U.S. Treasury Secretary John W. Snow made comments the market understood to mean he was ready to let the dollar slide as a way to goose U.S. export growth. So the BOJ pulled out the big guns, buying nearly $35 billion in May and the first half of June. At the same time, the bank smartly timed its interventions to get the maximum bang for the buck. "They leveraged all their trades" to the max, says Barclays Global Investors currency strategist Masahiro Fukuhara.

An added benefit: Even as the yen has stayed steady against the dollar, the euro is up by 10% vs. the yen so far this year. That's great news for Japanese companies such as Toyota (TM ), Mazda, and Sony (SNE ) which ship products to the euro zone. So for once, at least, the wags in the international financial community can keep their chuckles to themselves. In the currency war of 2003, Japan's financial bureaucrats have won hands-down.

By Brian Bremner

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