Incoming Prime Minister Yoshihiko Noda oversaw Japan’s biggest currency intervention in seven years last month as finance minister, but he may have to take even bolder steps to rein in the yen.
The government sold ¥4.51 trillion in the currency market during August, according to a statement released Wednesday by the Finance Ministry, the largest monthly total since March 2004. Noda, who was elected prime minister in the Diet on Tuesday, faces pressure to reverse three straight quarters of economic contraction, largely due to the yen’s advance to a postwar high against the dollar, hitting the earnings of exporters.
“Intervention won’t stop the strong yen trend,” said Tsutomu Soma, a bond and currency dealer at Okasan Securities Co. in Tokyo. “Policymakers need to do something drastic, something that can hurt the market players so much that it will change the yen’s rising direction.”
Japan’s currency has rallied 3.1 percent since the government’s Aug. 4 intervention pushed the yen to as low as 80.24 to the dollar. But the yen has erased all its losses since then, even though the Bank of Japan expanded monetary stimulus by ¥10 trillion and the Finance Ministry introduced a $100 billion funding program to encourage domestic businesses to shift yen-denominated funds to foreign currencies.
The yen has climbed 6.5 percent over the past three months versus its U.S. counterpart and touched a postwar record of 75.95 per dollar on Aug. 19, reducing the value of domestic exporters’ overseas sales when repatriated.
The intervention in August was the biggest since the government sold ¥4.53 trillion in March 2004 as part of ¥14.8 trillion in total sales in the first quarter of that year. The BOJ sold ¥692.5 billion in March on behalf of the government, leading a coordinated effort with the Group of Seven advanced industrial nations to counter the yen’s strength after the March 11 earthquake and tsunami.
“The effects of one-off currency sales haven’t lasted long and just give traders a good opportunity to sell the dollar against the yen,” Okasan’s Soma said. “We have little hope unless there is a big change in policy.”
Noda, 54, who will become the sixth new prime minister in five years, said Wednesday he talked with U.S. Treasury Secretary Timothy Geithner on the phone and they agreed Tokyo and Washington will work together to ensure global economic stability. The two didn’t discuss foreign exchange intervention or currencies, Noda told reporters.
“Japan will step in again when necessary and they are waiting for the right timing,” Masafumi Yamamoto, chief currency strategist at Barclays Bank PLC, said in Tokyo. “When downward pressure for the dollar recedes while the yen stays at strong levels, intervention by the BOJ will probably have a bigger impact on the dollar-yen rate.”
Noda presided over Japan’s only currency interventions since 2004 after he became the youngest finance minister in two decades in June 2010. Last September, Japan unilaterally sold ¥2.12 trillion.
He has advocated raising taxes rather than issuing bonds to pay for rebuilding after the record quake and ensuing nuclear disaster, and to reduce the world’s largest debt.
Speaking Tuesday after the last Cabinet meeting of departing Prime Minister Naoto Kan, Noda said he wants to quickly pass a third postdisaster stimulus plan. Japan’s fiscal situation is “severe,” and the country can’t postpone revamping the tax and social welfare systems, he said.
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