Japan Follows Switzerland in Acting to Weaken Currency to Protect Exports

Japan acted alone in the market, while officials were in touch with other nations, Finance Minister Yoshihiko Noda told reporters today. The Bank of Japan (8301) followed up with monetary stimulus that totaled double the amount pledged days after the March 11 earthquake. The yen weakened to 80 per dollar for the first time since July 12 at 10:58 a.m. in London.

Today’s moves reflect deepening concern of a U.S. return to recession that might force the Federal Reserve into another round of asset purchases and a widening in Europe’s debt crisis, with a sell-off in Spanish and Italian debt. The concerns have prompted investors to seek havens in the currencies of Japan and Switzerland, which both enjoy current-account surpluses, and those of emerging markets with faster growth rates.

“What you’re seeing now is policy makers responding because it’s beginning to hurt their overall economic prospects, particularly in the case of Japan, where the economy is pretty vulnerable after the March earthquake,” said Richard Jerram, chief economist at Bank of Singapore who has analyzed Asian economies for two decades.

Gain in Stocks

Japan’s stocks rose, with the benchmark Nikkei 225 Stock Average advancing 0.2 percent to 9,659.18. Against the euro, the yen lost 3.2 percent to 113.90, still stronger than the Japanese currency’s two-month average.

Finance officials from the Group of Seven nations held a conference call yesterday to discuss the European debt crisis and the U.S. political stalemate over raising the borrowing ceiling, according to a G-7 official. The person spoke on condition of anonymity.

Switzerland yesterday unexpectedly cut interest rates and pledged to boost the supply of the franc in money markets. The nation’s exchange rate has soared 23 percent in the past six months against the dollar. Turkey’s central bank today said it will sell dollars to banks via auctions when it sees necessary to support foreign exchange liquidity in the domestic market.

Profit Forecasts

The decision by Japan followed gains in the yen that saw it approaching a postwar high against the dollar. The current level is still about 4 percent stronger than the 82.59 average exporters used in profit forecasts in a Bank of Japan survey released last month. Toyota Motor Corp. sees a yen stronger than 80 as a brake on growth.

“Though it is minimal, any positive moves are welcome,” Minoru Mitsuda, executive officer at Mazda Motor Corp. (7261), said in reference to today’s intervention. “All companies were waiting for some kind of action from the government.”

Mazda, which exports about 80 percent of its cars, is basing the yen-to-dollar rate at 83 yen to the dollar, and 113 yen for the euro.

The BOJ, which brought forward its scheduled statement by a day following a shortened policy meeting, expanded an asset- purchase fund that includes government bonds, real-estate investment trusts and corporate debt to 15 trillion yen from 10 trillion yen. It also boosted a program aimed at encouraging banks to lend by 5 trillion yen, bringing it to 35 trillion yen.

‘Downside Risks’

The central bank needs to “pay more attention to downside risks” as global uncertainties have prompted the yen’s strengthening, Governor Masaaki Shirakawa told reporters in Tokyo today after the decision.

The dollar’s tumble, along with Europe’s debt concerns, have spurred an influx of capital to emerging markets that threatens to destabilize their financial markets and economies. Brazil’s Finance Minister Guido Mantega has labeled the tensions “currency wars.” Latin American finance officials plan to gather this month to discuss ways to protect their currencies and economies from the turmoil in the U.S. and Europe.

Today’s step is the third time Japan intervened after six years of a hands-off approach ended in September 2010. The BOJ, at the behest of the Ministry of Finance, sold 692.5 billion yen ($8.7 billion) in March, when it led a coordinated effort with the Group of Seven to counter a jump in the yen on speculation insurers would repatriate foreign cash after the quake.

‘Very Tough’

“The yen’s level now is still a very tough level for exporters,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “Intervention today doesn’t eliminate these problems.”

The dollar touched its weakest level since 1995 last week, according to the Fed’s Trade-Weighted Broad Dollar index, undermined by evidence of a deteriorating American economy.

A government report tomorrow may show the unemployment rate was 9.2 percent in July, according to the median forecast in a Bloomberg survey, up from 8.8 percent in March. U.S. gross domestic product expanded at an annual rate of 1.3 percent last quarter, from a near-stall of 0.4 percent in January to March.

The dollar’s status as the world’s reserve currency “appears to be slipping,” an advisory panel to the Treasury Department said yesterday. The Treasury Borrowing Advisory Committee, which includes representatives from firms ranging from Goldman Sachs Group Inc. (GS) to Pacific Investment Management Co., said the outperformance of haven currencies and those from emerging nations has aided in the debasement of the dollar’s reserve status, a release by the Treasury showed.

Japan’s Challenges

In Europe, policy makers have failed to contain a crisis that’s required a second bailout of Greece. Spanish and Italian 10-year government bond yields reached euro-area record levels this week on concern that increasing debt-servicing costs and stunted growth may wipe out the benefits of fiscal tightening.

Japan’s challenges have been compounded by the earthquake and tsunami that wreaked 16.9 trillion yen of damage, according to a government estimate, and left the economy shrinking for an estimated three straight quarters through June.

Prime Minister Naoto Kan has implemented two supplementary budgets totaling 6 trillion yen to contend with spending needs including emergency housing for the displaced. A third package may come in at 10 trillion yen, ruling party officials have said.

‘Bold Action’

The appreciation in the yen is hurting Japanese pharmaceutical companies, and the currency on its own doesn’t warrant strengthening, Yasuchika Hasegawa, head of the Japan Association of Corporate Executives, told reporters in Singapore yesterday. “We, as an industry, are in a very tough situation,” said Hasegawa, who is president of Osaka-based Takeda Pharmaceutical Co., Asia’s largest drugmaker.

“Ongoing one-sided moves would hurt Japan’s economy at a time when everyone is working hard to rebuild the nation from the earthquake,” Noda said at a press conference in Tokyo today. Asked whether intervention can be effective, he said “we need to take bold action against disorderly and speculative movements.”

The finance chief declined to comment when asked if authorities would keep selling the yen. In the weeks following the September intervention, the currency returned to previous levels. After the coordinated March 17 move, it still appreciated 2.4 percent the following month.

(Bloomberg News)

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