• Bloomberg


Japan’s first intervention in the foreign exchange market in almost six years may undermine calls for China to let its currency appreciate.

The move to protect Japanese exporters by weakening the yen against the dollar was confirmed Wednesday by Finance Minister Yoshihiko Noda.

China, the world’s largest exporter, is under pressure to let its currency rise more quickly, with U.S. lawmakers Wednesday beginning a two-day meeting to address the issue. Japan’s example may give China extra ammunition to resist calls for immediate action at a meeting of Group of 20 finance ministers in Washington next month.

It’s “certainly a comforting factor for China, which has been heavily intervening for a long time,” said Tomo Kinoshita, cohead of Asia economic research at Nomura Holdings Inc. in Hong Kong. “China’s trade surplus is still sizable and it’s going to be under pressure to move its exchange rate more flexibly.”

The People’s Bank of China fixed the yuan’s reference rate at a record high Wednesday before the U.S. House Ways and Means Committee convened a meeting to discuss the Asian nation’s currency policy. The Chinese central bank declined to comment on Japan’s intervention.

Calls from within the U.S. administration and Congress for action have intensified after China ran up a $119 billion trade surplus with the U.S. in the first half of 2010, putting it on course to exceed last year’s total of $227 billion, according to U.S. Commerce Department figures.

Japan’s decision to take steps to arrest the yen’s gains, which erode the competitiveness of the nation’s exports, will be closely watched by policymakers across the region, said Richard Yetsenga, the Hong Kong-based global head of emerging markets currency strategy at HSBC Holdings PLC.

“In the rest of Asia, Japan’s intervention would be used as another piece of evidence that there is nothing necessarily inappropriate to their approaches to exchange rate management,” Yetsenga said.

Policymakers in Malaysia, Thailand, the Philippines and South Korea have signaled they may intervene if necessary to limit volatility in their currencies.

Bank Negara Malaysia Gov. Zeti Akhtar Aziz, who eased currency controls last month, said Aug. 24 the central bank “will be there” when there are excessive and sudden moves in the foreign exchange market.

Thai Finance Minister Korn Chatikavanij said Monday that the central bank is doing an “appropriate job of taking care” of the baht. Philippine authorities are “watchful” of gains in the nation’s currency, central bank Gov. Amando Tetangco said in an e-mail late Tuesday.

Economies around the world are counting on exports to buttress growth. U.S. President Barack Obama is seeking to double his nation’s overseas shipments in five years to bolster an economy hampered by elevated unemployment.

Countries like “South Korea will be thinking to themselves ‘what took you so long?’ ” said Huw McKay, a senior international economist at Westpac Banking Group in Sydney. “Japan has been almost stoic in dealing with a strong yen since Lehman Brothers Holdings Inc. collapsed” two years ago, McKay said.

He said it would be “disingenuous” for other Asian nations to use Japan’s action as justification for their own intervention.

The real effective exchange rates of Japan’s competitors “have been very weak and relative to precrisis levels they haven’t come close to reclaiming those levels,” he said.

Speculator flight

Japan’s intervention to weaken the yen may be “more successful” than markets expect as a falling currency will likely force out speculators, Citigroup Inc. said.

“There’s this prevailing wisdom that it’s going to be tough for Japan to succeed, but we think the market is far too complacent,” said Todd Elmer, a Singapore-based currency strategist at Citigroup.

Japan intervened in the foreign exchange market Wednesday for the first time since 2004 after a surge in the yen to the strongest against the dollar in 15 years threatened to stunt the economic recovery. Finance Minister Yoshihiko Noda said the move was unilateral.

Noda’s “unusually direct” comments while confirming the move to weaken the yen suggest this is “strong conviction” intervention, Citigroup analysts said in a research note Wednesday. Officials from the U.S., China and Canada separately declined to comment on the action.

“Many investors entered dollar-yen shorts at unattractive levels and could be frustrated by even a moderate intervention effort,” Citigroup analysts wrote.

Exchange barrier

Chief Cabinet Secretary Yoshito Sengoku made a “big mistake” by indicating a barrier for the yen’s exchange rate against the dollar, inviting an attack by speculators, according to JPMorgan Chase & Co.

Sengoku, asked at a news conference Wednesday whether the ¥82 per dollar level was being defended, said “that’s what the Finance Ministry seems to think.”

“At the end it’s inevitable that the yen will strengthen again, and the yen at 82 will become the focus for speculation that the government will intervene again,” said Tohru Sasaki, head of Japan rates and foreign exchange research at JPMorgan.

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