Tokyo Notes

No Yen for Intervention

A debate is raging in Japan about whether to intervene to lower the value of a soaring yen.

Senior government and Bank of Japan officials will have heaved a sigh of relief to see the yen weaken slightly at the end of this week after briefly reaching a 15-year high of 84.72 against the dollar on Wednesday. But the respite could be short-lived as debate rages on as to whether intervention should take place to lower the value of the yen.

In its editorial Friday, Japan’s biggest business broadsheet, the Nikkei, called for prompt intervention, saying there was no time for hesitation.

The Nikkei blamed the appreciating yen for Japan’s falling stock prices, which have slid 12.6 percent this year compared to the 0.5 percent fall in share prices in the United States. The fall in Tokyo stocks could not be explained in terms of poor economic growth and profitability, it argued, pointing the finger at the rising yen, which it said will force more businesses to shift operations overseas, putting further pressure on the domestic labor market and stifling long-term economic growth.

The nation’s largest daily, the Yomiuri, also called for swift intervention, saying a costly yen would hurt exporters who are leading the nation’s recovery, while lowering the price of imports, strengthening the grip of deflation on the economy.

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But with Finance Minister Yoshihiko Noda and Bank of Japan Governor Masaaki Shirakawa still only talking of carefully monitoring the situation, the powers that be remain clearly reluctant to embark on intervention at this stage, a position the Yomiuri lambasted.

Japan’s trade surplus and the limited effect of one country acting in isolation are among the factors that may be keeping the government from acting at this point.

While it might be relatively easy for a country to gain support for weakening its currency when it has a large trade deficit, when it has a surplus it instead comes across as a country that wants to have its cake and eat it. Besides, as the Yomiuri pointed out, the Obama administration has effectively embraced a weak dollar strategy for boosting US exports with Eurozone nations taking a similar tack. Under these circumstances, little help is likely to be forthcoming from other major economies.

Intervention by Japan alone can’t be sustained. But even so, the Nikkei demanded the government take action, and called on it to explain to its trading partners that such a move reflected a need to avoid excessive appreciation of the yen rather than market manipulation.

Japan last made a major effort to intervene in markets to weaken the yen in 2003 and 2004, spending 35 trillion yen in a process that had mixed results. Some economists and analysts argue that intervention can sometimes have the opposite effect to that intended, because it focuses attention on a currency’s value and the relative economic fundamentals of the country involved. Add to that the growing demand for the yen as a currency safe haven among risk-averse global investors, and the government might want to wait until the yen has passed clearly by last November’s high of 84.82 yen/dollar before taking action.

Another of the dailies, the Asahi, asked six analysts for their forecasts on the yen in its Friday edition. Most of them said they could see the currency rising to 82 yen against the dollar this year, although Hiromichi Shirakawa, chief economist at Credit Suisse mentioned a figure as high as 75 yen against the dollar. That would break the 1995 high of 79.75 yen to the dollar, which would surely be too much even for Prime Minister Naoto Kan’s administration not to embark on intervention.