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Forex intervention raises doubts

Prevailing view is authorities will have to take additional steps to keep economy on track

by Shinya Ajima

Kyodo

Thursday’s intervention in currency markets by the government clearly illustrated their fear that the economy could collapse unless they take action.

The world’s third-biggest economy was already under serious downward pressure from the massive earthquake and tsunami in March, which disrupted production and exports and triggered meltdowns at a nuclear power plant.

The intervention, the exact size of which is unknown, apparently succeeded in halting the yen’s surge to record levels. But a prevailing view is that the respite will be short-lived and authorities will have to take additional steps to keep the economy on a recovery track from the catastrophe.

The Finance Ministry, via the Bank of Japan, stepped into the foreign exchange market to sell yen for dollars, while the BOJ additionally eased monetary policy by expanding its asset-purchase program by ¥10 trillion to ¥50 trillion.

The joint assault helped push the dollar up by almost ¥3 to ¥80 at one point.

Finance Minister Yoshihiko Noda stressed the intention to “take tough measures against speculative moves.”

But many analysts said the move represents the government’s sense of crisis.

“The government made a relatively fast decision,” said Osamu Takashima, chief FX strategist at Citibank Japan Ltd.

Masamichi Adachi, senior economist at JPMorgan Securities Japan Co., said, “It showed how serious they are.”

But when it comes to the long-term effects of the intervention, doubts must be raised, with a notable reason for skepticism the fact that Noda said Japan intervened unilaterally.

Tokyo’s last attempt to manipulate the yen rate was in March as part of a concerted action organized by the Group of Seven industrialized economies, which includes the United States, Canada, Britain, France, Germany and Italy.

The joint intervention by the G-7, then the first in more than 10 years, amounted to a landmark event showing solidarity at a time when the Japanese economy was in disarray. The currency hit its highest against the dollar since the end of World War II on speculative moves following the March 11 disaster.

The coordinated action was widely seen as successful, despite Japan’s portion, which was much smaller than the amount of yen spent on the previous unilateral intervention in September.

“It did not work that much in September,” recollected a diplomat from one of the G-7 countries, who added that Tokyo’s latest unilateral action is again “leaning against the winds.”

The U.S. and many European governments are skeptical about Japanese intervention, which could complicate their efforts to encourage China to allow the yuan to move more freely.

“We should operate on the premise that a joint intervention would not ordinarily take place,” Takashima said. “The case in March was rare.”

Thursday’s intervention came in response to growing calls from major exporters, such as carmakers and high-tech firms, saying the currency’s rise had eroded their global competitiveness.

Noda told a Diet committee Wednesday that Japan must make “all-out efforts” to deal with the problem, suggesting the creation of a policy package to that end.

The BOJ’s additional easing was fairly consistent with that view. BOJ Gov. Masaaki Shirakawa warned that a stronger yen could accelerate moves by Japanese firms to shift production abroad and further weaken the economy.

The latest decisions cannot completely curtail upward pressure on the yen. Additional measures are likely to be needed, depending on developments overseas, particularly in the United States, analysts said.

Amid signs of slowing growth in the U.S. economy, there is a chance for the Federal Reserve to decide on additional monetary easing when the central bank meets next week, and this would trigger further selling of the dollar and appreciation of the yen.

“We have to defeat speculators,” a senior Finance Ministry official said, indicating Tokyo will continue to dip in. But it is unclear how far Japan can go without sufficient support from its fellow G-7 members.