Finance Ministry intervenes to stem gains in currency

by Aki Ito and Keiko Ujikane

Bloomberg

Japan followed Switzerland in seeking to stem appreciating exchange rates that threatened to damage export competitiveness, selling the yen and pledging to inject ¥10 trillion ($126 billion) in funds into the economy.

Japan acted alone in the market, while officials were in touch with other nations, Finance Minister Yoshihiko Noda told reporters Thursday. The Bank of Japan followed up with monetary stimulus that totaled double the amount pledged days after the March 11 earthquake.

At 11 a.m. in London, the dollar traded at ¥80.02-03, compared with ¥79.88-90 at 5 p.m. in Tokyo.

Thursday’s moves reflect deepening concern about a U.S. return to recession that might force the Federal Reserve into another round of asset purchases and a widening of Europe’s debt crisis, with a selloff in Spanish and Italian debt. The concerns have prompted investors to seek havens in the currencies of Japan and Switzerland, which both enjoy current-account surpluses, and those of emerging markets with faster growth rates.

“What you’re seeing now is policymakers responding because it’s beginning to hurt their overall economic prospects, particularly in the case of Japan, where the economy is pretty vulnerable after the March earthquake,” said Richard Jerram, chief economist at Bank of Singapore who has analyzed Asian economies for two decades.

Switzerland on Wednesday unexpectedly cut interest rates and pledged to boost the supply of the franc in money markets. The nation’s exchange rate has soared 23 percent in the past six months against the dollar.

The decision by Japan followed gains in the yen that saw it approaching a postwar high against the dollar. The current level is still about 4 percent stronger than the 82.59 average exporters used in profit forecasts in a Bank of Japan survey released last month. Toyota Motor Corp. sees a yen stronger than 80 as a brake on growth.

“Though it is minimal, any positive moves are welcome,” Minoru Mitsuda, executive officer at Mazda Motor Corp., said in reference to Thursday’s intervention. “All companies were waiting for some kind of action from the government.”

Mazda, which exports about 80 percent of its cars, is basing the yen-to-dollar rate at ¥83 to the dollar, and ¥113 for the euro.

Meanwhile, the BOJ, which brought forward its scheduled statement by a day following a shortened policy meeting, expanded an asset-purchase fund that includes government bonds, real-estate investment trusts and corporate debt to ¥15 trillion from ¥10 trillion. It also boosted a program aimed at encouraging banks to lend by ¥5 trillion, bringing it to ¥35 trillion.

The dollar’s tumble, along with Europe’s debt concerns, have spurred an influx of capital to emerging markets that threatens to destabilize their financial markets and economies.Brazilian Finance Minister Guido Mantega has labeled the tensions “currency wars.” Latin American finance officials plan to gather this month to discuss ways to protect their currencies and economies from the turmoil in the U.S. and Europe.

Thursday’s step is the third time Japan has intervened after six years of a hands-off approach ended last September. The BOJ, at the behest of the Finance Ministry, sold ¥692.5 billion in March, when it led a coordinated effort with the Group of Seven to counter a jump in the yen driven by speculation insurers would repatriate foreign cash after the quake.

“The yen’s level now is still a very tough level for exporters,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “Intervention today doesn’t eliminate these problems.”

The dollar touched its weakest level since 1995 last week, according to the Fed’s Trade-Weighted Broad Dollar index, undermined by evidence of a deteriorating American economy.

A government report July 29 shows the jobless rate held at 9.2 percent in July, according to the median forecast in a Bloomberg survey, up from 8.8 percent in March. U.S. gross domestic product expanded at an annual rate of 1.3 percent last quarter, from a near-stall of 0.4 percent in January to March.

The dollar’s status as the world’s reserve currency “appears to be slipping,” an advisory panel to the Treasury Department said Wednesday.

The Treasury Borrowing Advisory Committee, which includes representatives from firms ranging from Goldman Sachs Group Inc. to Pacific Investment Management Co., said the outperformance of haven currencies and those from emerging nations has aided in the debasement of the dollar’s reserve status, a release by the Treasury showed.

In Europe, policymakers have failed to contain a crisis that’s required a second bailout of Greece. Spanish and Italian 10-year government bond yields reached euro-area record levels this week on concern that increasing debt-servicing costs and stunted growth may wipe out the benefits of fiscal tightening.

Japan’s challenges have been compounded by the earthquake and tsunami that wreaked ¥16.9 trillion in damage, according to a government estimate, and left the economy shrinking for an estimated three straight quarters through June.

Prime Minister Naoto Kan has implemented two supplementary budgets totaling ¥6 trillion to contend with spending needs including emergency housing for the displaced. A third package may come in at ¥10 trillion, ruling party officials have said.

The appreciation in the yen is hurting Japanese pharmaceutical companies, and the currency on its own doesn’t warrant strengthening, Yasuchika Hasegawa, head of the Japan Association of Corporate Executives, told reporters in Singapore Wednesday. “We, as an industry, are in a very tough situation,” said Hasegawa, who is president of Osaka-based Takeda Pharmaceutical Co., Asia’s largest drugmaker.

“Ongoing one-sided moves would hurt Japan’s economy at a time when everyone is working hard to rebuild the nation from the earthquake,” Noda said at a press conference in Tokyo Thursday.

Asked whether intervention can be effective, he said, “We need to take bold action against disorderly and speculative movements.”

The finance chief declined comment when asked if authorities would keep selling the yen. In the weeks following the September intervention, the currency returned to previous levels. After the coordinated March 17 move, it still appreciated 2.4 percent the following month.