Yen's rally to continue as BOJ intervention unlikely

by Stanley White and Ye Xie


For the first time in more than a decade, foreign-exchange traders are confident the Bank of Japan won’t intervene in the currency market, paving the way for the yen to extend its biggest rally since 2000.

Japanese authorities sold the currency on all four occasions since 1995 when the yen approached the 100 to the dollar mark in a bid to support exporters from Toyota Motor Corp. to Sony Corp. When the yen strengthened to an eight-year high of 101.43 last week, Finance Minister Fukushiro Nukaga stopped short of signaling that officials are concerned, only saying the government needs to watch currency moves “carefully.”

An attempt to influence exchange rates would bring Japan into conflict with the U.S., which relies on a weak dollar to underpin an economy on the verge of a recession. Citigroup Inc. and Royal Bank of Scotland Group PLC, the third- and fourth-biggest traders, say Nukaga will let the yen break 100 because it’s 40 percent weaker than its peak in 1995 on a trade-weighted basis.

“When I intervened, the U.S. agreed to it,” said Eisuke Sakakibara, dubbed “Mr. Yen” for his ability to influence the foreign-exchange market as Japan’s top currency official from 1997 to 1999. “The U.S. now welcomes a gradual decline in the dollar and the Treasury takes the position of Detroit. This is affecting how Japan is responding now.”

Japan increasingly relies on Asia for growth, making the country less sensitive to a U.S. slowdown. Shipments to the U.S. accounted for about 20 percent of exports last year, down from about 30 percent in 2000. Asia consumes half of Japan’s exports.

Japan’s economy, the world’s second-largest, may expand 1.5 percent this year, matching growth in the U.S., the International Monetary Fund said on Jan. 29. It would be the first time Japan won’t lag the U.S. since 1991.

“Compared with the U.S., growth in Japan is relatively robust,” Sakakibara said. “The tables have turned.”

U.S. officials probably won’t support dollar purchases unless the yen breaks 90 and heads toward 80, Sakakibara said. Central banks intervene in the foreign exchange market when they buy or sell currencies to influence exchange rates.

The yen gained 0.4 percent to 102.24 at 12:51 a.m in Tokyo. Naoyuki Shinohara, currently Japan’s top currency official, told reporters Monday he’s “carefully” watching the market, reiterating Nukaga’s comments.

The yen has gained 19 percent since June, the second-biggest advance among the 16 major currencies behind the Swiss franc. Rather than a referendum on the economy, the rally was fueled by losses in the credit markets, which led investors to sell high-yielding assets around the world financed with cheap loans in Japan. They would need to buy yen to pay back the loans.

The yen’s real effective exchange rate, measured against 15 currencies of major trading partners, including China, Europe and Canada, is 99.5, according to Bank of Japan data. The rate averaged 121.9 in the first quarter of 2004, when the bank last intervened. It fell against the currencies of the Group of 10 most developed nations in the past three years except the dollar.

“The Bank of Japan can’t make the argument that the yen is overly strong,” said Collin Crownover, global head of currency management in London at Boston-based State Street Global Advisors, which oversees $100 billion in foreign exchange. “Relative to other currencies the yen is still very weak.”

The yen will rise to 95 per dollar, according to Citigroup, Lehman Brothers Holdings Inc., the fourth-biggest U.S. securities firm, and Mizuho Financial Group Inc., Japan’s second-largest publicly traded bank. Deutsche Bank AG and UBS AG, the world’s two biggest currency traders, predict the dollar will hold above ¥100.

“Risk aversion is already at fairly extreme levels and we think the market would be nervous of intervention below those levels,” said Ashley Davies, a strategist at UBS in Singapore.

The Group of Seven, which next meets April 12-13 in Washington, may signal its intent to consider coordinated intervention, UBS strategists wrote in a March 3 report. Unilateral intervention “seems unlikely” after Japan’s economy expanded every year since 2002, it said.

The Bank of Japan, on behalf of the Finance Ministry, sold a record ¥20.4 trillion in 2003 and ¥14.8 trillion in the first quarter of 2004, when the yen traded as high as 103.42 per dollar.

Zembei Mizoguchi, the currency chief who orchestrated the intervention, said at the time it was to boost confidence in the economy, which was in the middle of a decade of deflation. The yen also approached the 100 level in 1999, 2000 and 2003, prompting the BOJ to sell the currency each time.

BOJ Gov. Toshihiko Fukui said March 7 he expects the central bank to maintain his policy of gradually raising rates when he retires on March 19 after inflation in January rose at 0.8 percent, the fastest pace in nine years.

A stronger yen will “ease any negative effect from rising costs of crude oil and commodities,” he said.

Toyota aims to absorb the impact of a rising yen by building more cars in the markets where they are sold, President Katsuaki Watanabe said in Tokyo on March 7.

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