Japan yesterday (Wednesday) intervened in the currency market for the first time since 2004 to weaken a surging yen that reached a 15-year high against the U.S. dollar - and the government intervention is expected to continue.
The Japanese yen hit 82.88 against the dollar, alarming the country's officials who are worried that the rising currency would cut into exporters' profits. The yen had risen more than 11% since mid-May.
"We can't overlook these movements that could have a negative effect on the stability of the economy," Finance Minister Yoshihiko Noda said Wednesday. "We will continue to watch developments in the market carefully and we will take bold actions including further intervention if necessary."
Prime Minister Naoto Kan faced pressure from businesses to stop the rising yen from hurting major corporations and weakening Japan's economic recovery. The government's foreign-exchange intervention totaled almost $12 billion, and the currency promptly responded, falling more than 3% to 85.59 per dollar. The Nikkei Stock Average rose Wednesday 2.5% to 9516.56.
The move surprised investors who have been pouring funds into the yen as a risk-averse investment. They doubted the willingness of Japan's government to follow through on policy changes, especially after it unveiled an ineffective stimulus package last month that failed to halt the strengthening yen.
"Investors were starting to doubt the government's commitment to its pledge that it would take bold action," Yoshimasa Maruyama, senior economist at Itochu Corp. in Tokyo, told Bloomberg.
The central bank took the move a step further than previous currency interventions by leaving the yen used to buy dollars in the financial system to add to general market liquidity. Usually the Bank of Japan would sell domestic securities to clean up extra funds.
Major Japanese exporters were happy with the news after months of watching profits from overseas sales shrink as they repatriated funds, and seeing exports become less competitive against foreign markets. Companies have cut costs, shifted production overseas and raised prices to offset losses.
Exporters are still basing profit forecasts on a yen level far from where it is now. Most companies remain profitable based on a yen trading at 92.90 per dollar or cheaper, according to the Cabinet Office's annual report.
"Whether the intervention can really help car makers depends on how long the intervention continues...the best scenario is to go back to 90 yen," Tatsuya Mizuno, analyst at Mizuno Credit Advisory, told The Wall Street Journal.
Japan's move is a good first step to aid the ailing economy, but analysts say the country needs to do more for a long-term resolution, and it could take international cooperation to gain real results.
"The yen is rising on the back of global moves to keep home currencies weak and amid continuing expectations for further monetary easing in the U.S.," Yutaka Miura, senior technical analyst at Mizuho Securities, told The Journal. "Unless there are fundamental changes in these areas, it will not be possible to stem the yen's rise."
Decision Makes Waves in Foreign Governments
Getting overseas authorities to coordinate any currency efforts would be difficult. Many U.S. and European officials expressed frustration toward Japan's decision.
Rep. Sander M. Levin, D-MI, chairman of the House Ways and Means Committee, called the move "a deeply disturbing development."
Luxembourg Prime Minister Jean-Claude Juncker told reporters that Japan's action was not an "appropriate" way to address global imbalances.
Many central banks have remained silent, but many countries see their export-driven growth threatened by a cheaper yen.
"There's a basic dilemma for the world as everyone wants to export their way out of trouble and can't," Jim O'Neill, chief economist at Goldman Sachs Group Inc. (NYSE: GS), told Bloomberg. "It's a very sensitive topic for the developed countries and markets."
China for decades has kept its currency undervalued to boost exports, to the chagrin of developed nations. China announced in June it would unpeg the yuan to the U.S. dollar, but has only allowed the currency to rise less than 1% since.
Tetsufumi Yamakawa, head of research at Barclays Capital in Tokyo, said Japan's move "would give a good excuse to China for not moving by claiming that the Japanese authorities are manipulating their currency [as well]."
The United States has resisted taking drastic measures against China's currency manipulation for fear the Asian powerhouse would retaliate by stopping purchases of U.S. government bonds. But economist Paul Krugman pointed out in The New York Times that ending such purchases would not be a bad thing.
"It's true that the dollar would fall if China decided to dump some American holdings. But this would actually help the U.S. economy, making our exports more competitive," wrote Krugman. "Ask the Japanese, who want China to stop buying their bonds because those purchases are driving up the yen. [I]n the current environment, Chinese purchases of our bonds don't help us - they hurt us. The Japanese understand that. Why don't we?"
Now that Japan has the markets' and investors' attention, analysts say it needs to continue action to lead to successful currency resolution and economic recovery.
"The Japanese authorities need to be aggressive now and hit the market hard, fast and furious because as time goes on, the announcement effect will dissipate," David Bloom, global head of foreign-exchange strategy at HSBC, told MarketWatch.
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