Narrowing gap between yields making dollar assets relatively less attractive

U.S. Treasurys foiling intervention

by Monami Yui and Shigeki Nozawa

Bloomberg

Finance Minister Jun Azumi’s efforts to weaken the yen are being foiled, in part, by U.S. Treasurys.

Finance Ministry data released Tuesday showed Japan conducted an unannounced intervention worth ¥1.02 trillion during the first four days of November, as part of ¥14.3 trillion worth of sales in 2011. Still, the currency traded within 1.8 percent of its postwar record, clouding the outlook for he economy’s export-led recovery from the Great East Japan Earthquake.

Analysts say one of the reasons for the yen’s strength is that the gap between yields on two-year and five-year Treasurys is narrowing more than that for Japanese government bonds of equivalent maturity. The difference between the two spreads shrank to 0.35 percentage point Wednesday from 1.19 points a year earlier, making yields on dollar assets relatively less attractive.

“The narrowing rate gaps between the two countries put pressure on the yen to rise and fan expectations for further easing by the BOJ,” said Toru Suehiro at Mizuho Securities Co., one of the 25 primary dealers obliged to bid at government debt sales.

Investors are also pouring money into the yen and Japan’s bonds as Europe’s financial crisis deepens, because the domestic markets are perceived as a haven supported by ¥1.47 quadrillion in financial assets held by households as of September, according to BOJ data. Japanese investors own about 92 percent of the nation’s notes, and a current-account surplus makes it unnecessary for the nation to rely on overseas residents to pay for the world’s largest debt.

The Federal Reserve is moving closer to the BOJ’s policy stance by pledging to keep interest rates low for extended periods and setting a long-term goal for price stability, BOJ Gov. Masaaki Shirakawa said earlier this week.

The central bank has held its key rate near zero since October 2010 and established a ¥20 trillion asset purchase fund. It separately buys government bonds at an annual pace of ¥21.6 trillion.

The yen has risen against all but one of its 16 major counterparts over the past 12 months. Azumi said Tuesday he wouldn’t rule out any options to curb currency gains.

The stronger yen has hampered Japan’s recovery from the March 11 quake and tsunami because it erodes earnings at the nation’s manufacturers when repatriated and makes their goods less competitive.

Sharp Corp. last week forecast its worst annual loss since it was founded a century ago, with the company’s president saying the strong yen made exporting “nearly impossible.”

Last month, the BOJ lowered its forecast for economic growth to 2 percent in the year starting in April from an October estimate of 2.2 percent, citing an overseas slowdown and the appreciating currency.

The yen traded at around 76 to the dollar in Tokyo on Wednesday, after reaching its postwar high of 75.35 Oct. 31.

Finance Ministry data Tuesday confirmed that Japan continued to sell yen in so-called stealth intervention, following three sales last March, August and October. Intervention is defined as “stealth” when it’s done without any announcement from the ministry, according to Junichi Ishikawa at IG Markets Securities Ltd. in Tokyo.

Japanese authorities pursued what they determined to be the most effective strategy when conducting unannounced yen sales in November, a government official said Tuesday. The official declined to comment on whether U.S. officials were given notice about the stealth operations.

The Finance Ministry report “tells you that the authorities tried to minimize the size of yen sales,” said Yunosuke Ikeda at Nomura Securities Co., the nation’s biggest brokerage. “They must have been extremely cautious so that interventions wouldn’t be too obvious.”

Japan sold a record ¥8.07 trillion Oct. 31, and then an average of about ¥255 billion in each of the next four days, according to Finance Ministry data.

The first intervention of 2011 was a ¥692.5 billion sale on March 18. The BOJ led a coordinated effort with Group of Seven nations to counter a jump in the yen after the twin disasters had struck Tohoku a week earlier, stoking speculation companies would repatriate overseas assets to pay for rebuilding.

Prime Minister Yoshihiko Noda, finance minister at the time, ordered the central bank to intervene again unilaterally Aug. 4.

The U.S. Treasury Department criticized Japan in a December report for selling its currency in August and October when market conditions were orderly, saying Tokyo should focus on steps to “increase the dynamism of the domestic economy.”

“The hurdle for Japan to unilaterally intervene has got pretty high since it received almost the first public criticism from the U.S.,” said IG Markets’ Ishikawa. “Unless the yen at least breaks the record high, we have a low likelihood of intervention. Japan is unlikely to take the diplomatic risk, even if they’d really like to weaken the yen.”