TOKYO: Japan’s efforts to curb the yen’s strength through currency market intervention have reached a crossroads, with its Group of Seven (G7) partners calling for flexible exchange rates and a new finance minister taking charge.
Signs that Japanese authorities were finding it difficult to continue their large-scale yen selling intervention in the wake of the weekend G7 meeting pushed up the yen by more than 2% against the us dollar to 21/2-year highs yesterday.
Newly appointed Finance Minister Sadakazu Tanigaki said that Japan’s foreign exchange policy was unchanged, but analysts viewed the absence of intervention yesterday as a tell-tale sign of his dilemma: how to keep Japan’s export-led recovery on track without causing a furore among its trade partners.
Toru Umemoto, currency strategist at Morgan Stanley, said Tokyo was groping for an exit from its intervention policy, a delicate transition as its yen selling, seen aimed at defending a line in the sand drawn at 115 yen to the dollar, had caused various distortions in the market which could snap back.
“I think they want to quit intervention,” Umemoto said, adding that it was impossible for a single country to keep its currency at a certain level for a long time. Japan conducted a record 9 trillion yen (US$80bil) of intervention in just the first seven months of this year.
“They will probably have used about 11 trillion yen by the end of this month and they’ve achieved a reasonable level of results with it – the Nikkei is above 10,000, gross domestic product (GDP) is expanding even on a nominal basis,” Umemoto said.
In a joint communique issued after their weekend meeting in Dubai, finance ministers and central bankers from the G7 industrial powers had said more flexibility in exchange rates was desirable to promote smooth and widespread adjustments to the international financial system.
Umemoto said Japan could take one of two options.
The best way, he said, was to let the yen rise and then seek stability by intervening one last time after the currency had clearly overshot. The other option was to smooth the yen’s rise by intervening on a small scale.
The government’s trade statistics for August showed that exports had grown by 6.4% from a year ago, underscoring Japan’s export-led recovery story. The country’s GDP expanded by an annualised 3.9% in the three months to June from the previous quarter in real terms.
But Taisuke Tanaka, chief macro strategist at Credit Suisse First Boston, said that giving up and letting the yen rise freely was not an option for Tanigaki, given that the economy had yet to achieve a solid self-sustaining recovery.
He added that the fact that the Japanese authorities had long prevented the dollar from falling below 115 yen made it all the more difficult for them simply to change tack.
“You would expect the yen’s rise to eventually run its course if it were to hurt corporate earnings and the economy, dampening foreign investors’ Japanese stock buying,” Tanaka said.
“But when momentum in the yen builds up to a certain level, Japanese investors will repatriate their overseas investments and accelerate the yen’s rise,” he added. – Reuters
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