TOKYO INTERVENED in the currency markets for the first time in more than six years to weaken the yen yesterday, sending it nearly Y3 lower against the dollar to mitigate the threat its strength posed to Japan’s export-reliant economy.
The unilateral intervention marks a further easing of monetary policy as the Bank of Japan has decided not to sterilise the funds used to buy dollars, instead allowing them to add to general market liquidity.
The action comes at a sensitive time that could complicate the debate on China’s controls on the renminbi and raise the possibility of competitive devaluations. The intervention sent the yen from a 15-year high of Y82.88 to as low as Y85.52 in a matter of hours.
The Nikkei 225 share index rose more than 2 per cent higher in response as investors took heart that Japanese exporters might get relief.
The Japanese government did not say how much was spent on the intervention but one trader suggested the figure could be roughly between $16 billion to $20 billion (€12.3-€15.3 billion) judging from historic market action.
Yoshihiko Noda, the finance minister, told reporters that the yen’s sharp gains from Tuesday following Prime Minister Naoto Kan’s victory in his Democratic party’s leadership battle were “a problem that could not be overlooked” given that the Japanese economy has faced difficult circumstances for some time, including its ongoing struggles with deflation.
“In order to restrain excessive moves in the currency market we earlier carried out currency intervention,” Mr Noda said.
He said he was prepared to take further action if necessary, and that overseas authorities had been contacted.
The action caught many market participants by surprise as they had thought intervention would be less likely under Mr Kan than with his opponent in the leadership race Ichiro Ozawa.
The move won praise from business executives. “What is important is to signal to the world and particularly to currency speculators that the government will take firm action on irrational yen strength,” said Atsushi Saito, chief executive of the Tokyo Stock Exchange.
Traders said the action was being interpreted as what is known as a “smoothing operation”, which is carried out to flatten sudden moves in the currency rather than to send the currency to a specific point.
Japan’s intervention is likely to heighten tension around the already charged issue of China’s persistence in holding down the renminbi, which is set to be one of the most contentious issues at the forthcoming meeting of the G20 group of countries in Seoul. – (Copyright The Financial Times Limited 2010)
