Japan weakens Yen

Japan has stepped into the currency markets for the first time since 2004 in a bid to stem the yen’s appreciation against the dollar and safeguard a faltering recovery.

The move came a day after Prime Minister Naoto Kan reaffirmed his leadership in a ruling party election victory that saw off Ichiro Ozawa, a heavyweight political rival seen as more likely than Kan to take firm action.

The yen fell to as low as 85.45 to the dollar following the yen-selling intervention, which was triggered by the Japanese unit’s earlier surge to a fresh 15-year high of 82.86.

“We conducted a market intervention,” Finance Minister Yoshihiko Noda told reporters, pledging further “determined steps, including intervention, when necessary.”

After weeks of trying in vain to talk the yen lower through verbal warnings, the government’s tone had hardened ahead of Wednesday’s decision.

The yen’s appreciation puts many Japanese exporters at a disadvantage against foreign rivals as it erodes their repatriated earnings and competitiveness.

Unilateral action

Noda said the move was made unilaterally, but added Japan had been in touch with foreign governments amid qualms from the likes of Europe and the United States that exchange rates should be kept free-floating.

“Our country’s economy is still in a very severe situation with continued deflation,” said Noda. The yen’s rapid appreciation ”harms the stability of the economy and finances. We cannot tolerate it.” Noda did not reveal the size of the intervention but Dow Jones Newswires cited traders as saying that Japan’s Ministry of Finance had likely sold one trillion yen (11.7 billion dollars) during the day.

In a statement Bank of Japan governor Masaaki Shirakawa said he “strongly expects that the action taken by the Ministry of Finance in the foreign exchange market will contribute to stable foreign exchange rate formation.” The central bank has come under government pressure to do more to combat the strong yen and recently expanded a multi-billion-dollar loan scheme in an effort to help revive a recovery.

Retaining business, fighting deflation

A recent government survey suggested many companies were considering moving production overseas if the yen stayed high, casting a shadow over the nation’s recovery.

“Japan needed to intervene in order to try to prevent the yen rising to levels that would push exports lower and send the economy back into recession,” said Macquarie Bank’s Richard Jerram.

The strong yen also makes imports cheaper, prolonging a cycle of deflation that has hurt Japan for years as consumers defer purchases in the hope of further price falls.

News of the intervention also initially sent the dollar higher against other currencies including the Korean won, Taiwan dollar, Singapore dollar and Chinese yuan, which fell quickly.

Analysts say central banks in the region may now have a stronger argument to weaken their own currencies and boost the competitiveness of their export sectors, complicating efforts to encourage China to loosen its currency grip.

“Further intervention is likely over coming days and weeks,” said Mitul Kotecha, head of global forex strategy with Credit Agricole.

Effective?

Analysts doubt how effective such solo moves will be in the long term, given the yen remains a safe haven compared to other major units amid fears over the global economy.

And while the unit is at 15-year highs on nominal terms, it is still below its 1995 peak when adjusted for price changes and compared to a basket of currencies used by Japan’s largest trading partners, say analysts.

The currency hit an all-time high of 79.75 to the dollar in April 1995.

Japan “is clearly not a safe haven in terms of having bright economic prospects, but rather that its central bank is not showing the same readiness to de-base the currency” as overseas counterparts, said Jerram.