Tokyo Notes

Yen Set to Keep Rising

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Tokyo Notes

Yen Set to Keep Rising

The yen keeps rising. But is there anything Japan’s government can do to stop it?

Reports this week that Toyota is considering moving its production of Corollas overseas is another worrying sign that, with no end in sight for the appreciation of the yen, Japanese manufacturers will speed up their shift to overseas production.

With the market twitching at every remark made by Federal Reserve Chairman Ben Bernanke, the indications are that the yen is going to rise even higher with the likely unveiling of additional quantitative easing measures by the Fed in early November. It seems only a matter of time before the 80 yen to the dollar mark is breached.

The report about the possible Toyota move comes after recent comments by Canon, Mitsubishi, Honda and Suzuki about boosting overseas production to counter the soaring yen, which big players such as Toyota predicted would hover around the 90 yen mark this business year. Such estimates are now a distant dream with the yen trading in Tokyo around the 81.24 yen mark at 5 p.m. Friday. The head of Mitsubishi Motors slammed the government on Thursday for not understanding the burden the high yen was having on manufacturers.

One of the main concerns over major companies moving their production operations overseas is the detrimental effect this will have on employment levels in Japan, a fear expressed to me recently by an official at Nippon Keidanren, Japan’s national business association.

Now with the yen even higher than it was a month ago when Japan made its 2.2 trillion yen market intervention, the question is what can be done to halt the yen’s rise.

Some hopes are pinned on the upcoming meeting of G20 finance ministers and central bankers starting Friday in South Korea. Can they come up with some basic currency intervention guidelines or ideas for cooperation? That’s what Prime Minister Naoto Kan is hoping for, according to a report in the Asahi Shimbun, one of Japan’s main dailies.

With the United States and China at odds over currency matters, though, surely the result will be another of the vague catch-all statements that so often characterize these international talking shops.

While Japan probably has the best case to plead when it comes to intervening in the currency market, it has also criticized other nations’ market dealings drawing the ire of South Korea and China. Another intervention before the G20 FM meet now seems unlikely given that it would weaken Japan’s ability to argue for fair play. And while Tokyo’s first intervention may not have generated as much criticism as might have been expected, further interventions might see a less passive response.

But when the dollar starts trading below 80 yen, surely Japan will have to intervene again. Having already revealed its weapon, though, second time around it might need to use more money to achieve the same effect. So what else can be done other than direct intervention in the market?

If the upward pressure on the yen fails to subside after the Fed’s likely QE2 measures have been put into action, perhaps the Bank of Japan should be encouraged to respond in kind. In other words, now the BOJ has cast aside, for the moment at least, its upper limit on asset buying, maybe it should look well beyond the 5 trillion yen figure it announced on October 5.

Either way, let’s hope something gives soon, because for each day the yen remains at its current levels, the closer we come to the hollowing out of Japan’s domestic manufacturing base.