Japan intervenes in currency market to weaken yen for first time since 2004

Japan intervenes in currency market to weaken yen

TOKYO — Japan made a surprise foray into currency markets Wednesday to reverse the yen’s ascent, which has been bad for companies like Toyota and Sony that are critical to the country’s economy.

Relieved investors sent Japanese stock prices up 2.3 percent after news of the Bank of Japan’s market intervention came out. Shares of Japanese exporters jumped and the yen fell 3 percent or more against major currencies including the dollar, euro and British pound. It was the yen’s biggest one-day move against the dollar since the fall of 2008, at the height of the financial crisis.

Japanese officials would not provide a figure for how much yen the central bank sold in the market, and analysts cautioned that the long-term impact would depend on whether, and how, U.S. and European central banks respond.

The dollar purchases by Japan’s central bank caught markets off guard because traders had believed that Prime Minister Naoto Kan was unlikely to orchestrate such an intervention. But Tokyo has been under intense pressure from manufacturers whose exports have become less competitive around the globe as a result of the strong yen.

The yen had risen about 10 percent against the dollar this year, hitting a series of 15-year highs versus the U.S. currency since August.

Normally investors seeking stable investments in currency markets turn to the U.S. dollar, but the dollar has been slumping against other currencies in recent weeks as U.S. interest rates have fallen, making the dollar a less attractive investment versus other currencies. That has led risk-averse investors to shift money into the yen and the Swiss franc, both of which are also seen as safe places to park money.

A strong yen hurts Japanese exporters’ foreign income and makes their products less competitive in overseas markets. Toyota Motor Corp. estimates that every 1-yen climb versus the dollar saps 30 billion yen ($351 million) from earnings.

The government now has a “sense of crisis” about the yen, said Tomoko Fujii, a senior currency strategist at Bank of America Merrill Lynch. Officials fear “further yen appreciation would undermine the Japanese economy,” she said.

“We have conducted an intervention in order to suppress excessive fluctuations in the currency market,” said Finance Minister Yoshihiko Noda.

But there was widespread skepticism that Tokyo can keep the yen on a tight leash without coordinated action by major central banks around the world.

“The effect from Japan’s solo intervention won’t last very long. We have to see how the U.S. and European monetary authorities would react,” said Yuji Kameoka, chief forex strategist at Daiwa Institute.

For example, if the U.S. Federal Reserve sought to bolster the U.S. economy by ramping up purchases of Treasurys to drive down interest rates, that would potentially weaken the dollar against other currencies, including the yen.

“This could be a very tough time for Japanese authorities if the Fed really implements a massive quantitative easing,” Fujii said.

The yen’s rise has also underscored tensions with China. Some officials including the finance minister say China’s purchases of Japanese government bonds might be helping to drive the yen higher even as Beijing keeps its currency tightly controlled to protect the country’s exporters.

The yuan has risen less than 1 percent against the dollar since mid-June when Beijing said it would allow it to trade more freely after keeping it virtually unchanged for 18 months.

After the Bank of Japan sold yen on Wednesday morning, the dollar jumped above 85 yen from its earlier low of 82.87 yen.

Fujii, the BofA analyst, forecasts that the dollar will by year-end break under the all-time low of 79.75 yen hit in 1995.

Stock investors cheered Japan’s first currency intervention since 2004, sending the Nikkei 225 stock average up by 217.25 points, or 2.3 percent, to close at 9,516.56. Japanese exporters moved higher, including Toyota Motor Corp. with a 3.8 percent gain and Sony Corp. with a 4.1 percent gain.

The yen also weakened against other major currencies after the Bank of Japan made its move. The yen was down 3.2 percent against the euro and 3.8 percent against the pound in later trading in New York.

Japanese electronics giant Sony Corp. weighed in with a cautious statement. “While we welcome the latest currency intervention by the government and Bank of Japan … we hope they will continue to closely monitor foreign exchange trends and take appropriate measures,” it said.

The yen is seen as a safe haven currency. Japan’s government debt is largely owned by domestic investors, making the country less at risk to the capital flight that can occur when economic or political shocks cause confidence to collapse.

And even with interest rates near zero, Japan’s real interest rate is higher because of persistent deflation. For foreigners, that means yen-denominated assets will look more attractive as prices keep falling.

China’s acceleration of Japanese bond purchases — a strategy of diversifying its holdings of foreign assets which are currently concentrated in U.S. Treasurys — has also been blamed for contributing to the yen’s rise. But the purchases as a proportion of all Japanese bonds on issue are likely too small to have a sustained effect on the yen.

Playing to a domestic audience, Finance Minister Noda told a parliamentary finance committee last Thursday that finance officials are monitoring Beijing’s moves closely.

Japan’s previous attempts to slow the yen’s rise through intervention had little lasting effect. Between January 2003 and January 2004, Japan sold a total of about 35 trillion yen in a massive effort to fight deflation and slow the appreciation of its currency.

One reason that intervention is likely to be even less potent nowadays is that the global volume of foreign exchange trading has grown rapidly in recent years. Since 2007, average daily turnover has risen 20 percent to $4 trillion, according to the Bank for International Settlements.

More recently, Switzerland’s central bank abandoned its efforts to soften the Swiss franc, which had risen rapidly in the wake of the financial crisis.

Some analysts say the finance ministry’s currency intervention may be more potent if the central bank follows up with a policy change of its own. The Bank of Japan’s next board meeting begins Oct. 4.

Central bank Gov. Masaaki Shirakawa wasn’t offering any hints Wednesday, except to say the BoJ would pursue “strong monetary easing” and provide liquidity to financial markets.

The U.S. Treasury Department declined to comment on Japan’s currency move.

Associated Press Writers Malcolm Foster, Shino Yuasa, Mari Yamaguchi and Tali Arbel contributed to this report.