• Bloomberg


The yen’s third monthly gain against the dollar means the Bank of Japan may decide this week to boost injections of funds into the financial system as Policy Board members seek ways to stem the currency’s strength and spur growth.

The BOJ has eased policy at least five times since December 2009, all following yen advances in the prior month. The yen posted a 0.1 percent gain versus the drooping greenback last month and reached a postwar record of 75.95 per dollar on Aug. 19 even as Japan conducted its biggest currency-market intervention in seven years.

The BOJ’s key interest rate is the lowest in the world at a range of zero to 0.1 percent, and hasn’t been above 0.5 percent since 1995.

A report last week showing a slowdown in domestic factory output was the latest sign that the yen’s strength is impeding economic recovery from three quarters of contraction. Net exports, or shipments minus imports, in the second quarter were the biggest drag on gross domestic product since 2009.

The BOJ will hold a two-day policy meeting Tuesday ahead of a Federal Reserve gathering that starts Sept. 20.

“Because there’s no doubt the most serious risk to Japan’s economy comes from foreign exchange, we can say it’s the biggest deciding factor for BOJ policy,” said Chotaro Morita, chief rates strategist in Tokyo at Barclays Capital Japan Ltd., one of the 25 primary dealers obliged to bid at government debt sales. “Additional easing must be in the BOJ’s sight, given monetary policy in the U.S. may put further appreciation pressure on the yen.”

The BOJ said on Aug. 4 it was doubling the amount of government debt it buys through its asset-purchase program and the same day intervened in the foreign-exchange market for a third time in a year. The yen weakened to 80.24 per dollar on that day before erasing all the losses in the next three days.

Japan sold ¥4.51 trillion in August, a statement from the Finance Ministry showed last week, the largest monthly amount since March 2004. Yoshihiko Noda, who has succeeded Naoto Kan as prime minister, oversaw the operations as finance minister.

Demand for safer assets increased last month amid concern the U.S. recovery is faltering and Europe’s debt crisis is worsening. Yields on 10-year government debt slid to a record 1.9735 percent in the U.S. and a nine-month low of 0.97 percent in Japan on Aug. 19, while the MSCI World Index for stocks slumped 7.3 percent for the month, the most since May 2010.

The yen tends to strengthen during periods of financial stress because Japan’s export-reliant economy doesn’t need foreign capital to balance its current account, the broadest measure of trade.

A stronger currency reduces the overseas competitiveness of Japanese companies, and cuts the value of foreign earnings when repatriated.

The extra yield investors demand to own Japanese corporate bonds instead of similar-maturity government debt is 66 basis points, down from this year’s peak of 78 basis points on June 10, according to Nomura Securities Co.’s Bond Performance Index.

The extra yield investors demand to hold two-year Treasuries instead of the Japanese equivalent slid to three basis points Thursday, the least since 1992, diminishing the appeal of dollar-denominated assets.

BOJ Gov. Masaaki Shirakawa said Aug. 4 that there is a “relatively high” correlation between the two-year yield gap and the dollar-yen rate.

The BOJ currently buys Japan’s bonds with remaining maturities of between one and two years through its asset-purchase fund. Barclays’ Morita said the central bank may increase the amount of bond purchases or buy longer-maturity debt.

A few Fed policymakers favored more aggressive action to stimulate the U.S. economy, minutes of their Aug. 9 meeting showed last week. Those members, who weren’t identified, “felt that recent economic developments justified a more substantial move” beyond the pledge adopted last month to hold its key interest rate at a record low until mid-2013.

U.S. GDP grew at a 1 percent annual pace in the April-June quarter, down from the 1.3 percent previously reported, Commerce Department data showed recently.

“The Fed will do something for sure in September to bolster the economy, which will lead to further weakness in the dollar,” said Tsutomu Soma, a bond and currency dealer in Tokyo at Okasan Securities Co., another primary dealer. “We can increase dollar shorts against the yen without any fear in this environment.”

Japan’s benchmark 10-year bonds yielded 1.07 percent Friday, 10 basis points from the lowest level since Nov. 9, amid evidence the economy is struggling to recover from the record earthquake in March that triggered meltdowns at a nuclear facility and nationwide energy shortages.

Industrial production gained 0.6 percent in July from the previous month, the slowest increase since March, the trade ministry said Aug. 31.

“There is a real threat of a double-dip recession to the global economy,” bolstering demand for bonds, said Daisuke Uno, Tokyo-based chief strategist at Sumitomo Mitsui Banking Corp., which manages $964 billion in customer deposits.

Credit-default swaps insuring Japan’s sovereign debt for five years climbed to 113 basis points on Aug. 24, the highest since March 16, according to New York-based CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million in debt.

Ministers unite on yen


Finance Minister Jun Azumi and three other Cabinet members handling economic issues under new Prime Minister Yoshihiko Noda agreed Sunday to quickly implement measures to stem the yen’s historic surge, one of the ministers said.

Motohisa Furukawa, economic and fiscal policy minister, told reporters the measures, which he didn’t specify, were agreed upon during a meeting involving Azumi, Furukawa, Yoshio Hachiro, minister of economy, trade and industry, and Tatsuo Hirano, minister in charge of reconstruction in areas hit hard by the March 11 earthquake and tsunami.

The four Cabinet members gathered at a hotel in Tokyo to discuss the yen’s appreciation, a third extra budget for the current fiscal year ending next March, proposed provisional tax increases and how to facilitate reconstruction in areas hit hard by the March disaster.

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