Market participants remain skeptical of the impact of the government’s $100 billion package aimed at curbing the rising yen, and are on the lookout for additional intervention in the near future.
Speculation over fresh intervention, possibly this week, is rising amid indications the U.S. Federal Reserve may further ease monetary conditions to boost the U.S. economy, triggering another surge of the yen.
Wednesday’s policy announcement came as the government appears unlikely to persuade the Group of Seven industrialized nations to take concerted action and seems to be playing for time ahead of a September meeting of the G-7 finance ministers and central bank governors in France.
The government unveiled a set of emergency steps centering on a $100 billion program to encourage the selloff of the yen by Japanese firms accumulating funds for overseas mergers and acquisitions.
Under the one-year program, the Finance Ministry is to provide such funds to companies from its foreign exchange reserves, the world’s second-biggest, in the form of cheap loans through financial institutions, in the hope of generating a “pump-priming” effect that will prompt firms to buy foreign currencies for external investments.
The ministry will also oblige financial institutions operating in Japan to report their positions in foreign exchange trading on a daily basis in September to gauge speculative bets by hedge funds and other short-term investors who tend to cause excess volatility in the market.
Market players are now focusing on a speech Friday by Federal Reserve Chairman Ben Bernanke. If he announces additional monetary easing by the central bank to support the slowing U.S. economy, that could boost the yen further against the dollar.
The Japanese government and the BOJ are “on maximum alert,” a senior government official said, while a source close to the Finance Ministry said it is “waiting for right time to conduct the most effective intervention.”
Concerning the $100 billion package, “Promoting foreign direct investment by mitigating risks (for the private sector) can be seen as having the effect of leveraged reinvestments of foreign exchange reserves,” Koji Fukaya, chief currency strategist at Credit Suisse Securities (Japan) Ltd., said in a report. Fukaya praised the policy as “balanced” and said the measure “could have a psychological effect to some extent and help curb the buying of the yen.”
But other analysts are skeptical about the effectiveness of the new steps.
“This policy itself is unlikely to amount to a weakening of the yen,” said Osamu Takashima, chief FX strategist at Citibank Japan Ltd.
“This is in effect a policy of financing the yen-selling and foreign currency-buying (by companies) with foreign exchange reserves, and will never affect the actual supply and demand in the market,” Takashima said, suggesting that such a policy could end up suppressing trading incentives.
“The government is apparently trying to control the mind of market players at a time when it faces difficulty intervening in the market so often,” he said.
Takahide Kiuchi, chief economist at Nomura Securities Co., echoed the view, writing in a report, “It is uncertain how much this scheme could work to curb the yen’s rise by affecting supply and demand in foreign exchange.”
The policy announcement came out of the blue at an urgently arranged news conference, where Finance Minister Yoshihiko Noda said, “I hope this will help to address the recent one-sided movement in the currency market.” He repeatedly indicated the ministry and the Bank of Japan are ready to intervene again to weaken the yen.
A few hours earlier, Moody’s Investors Service Inc. had announced it had lowered the credit rating on Japanese government bonds for the first time in nine years, citing the nation’s huge budget deficit and debt.
Some analysts interpreted the policy as a sign that the Finance Ministry wants to prevent a fresh round of intense buying of the yen as a result of Moody’s downgrade, which could have added to the recent jitters in the global financial markets and led to more buying of the yen, which is purchased for its relative safety due to Japan’s huge external surplus.
The yen hit a postwar record high of 75.95 to the dollar Aug. 19. The Japanese currency has strengthened beyond levels seen before the Aug. 4 intervention by the ministry and the BOJ, increasing pressure on the government to deal with negative fallout on domestic exporters, whose global competitiveness has been eroded by the stronger yen.
The unilateral intervention cast doubt on the effectiveness of any action by Japan in the market without help from other G-7 member countries.
Getting the G-7 to agree to a joint intervention remains unlikely due to the skepticism of some members toward manipulating foreign exchange rates.
But it is not easy for the government to take to the sidelines prior to the G-7 meeting in Marseille, as the yen could rise even further and set a new postwar high.