By Shigeo Kodama and Max Sato
TOKYO (MNI) – For Japan’s policymakers, it’s best to keep investors
guessing whether Tokyo will intervene to stem a rapid rise in the yen,
since there is little they can do to reverse a trend sparked by the U.S.
debt ceiling and European sovereign crises.
The Ministry of Finance will keep watching for a surge in the yen
against the dollar — both its pace and levels — and will intervene
when it feels that a lopsided move poses a serious threat to corporate
profits and public sentiment, as it has done in the past.
There is always an intervention risk for yen bulls when the
dollar/yen exchange rate gets closer to an all-time low of Y76.25, but
there are differences between now and last September, when Japan
intervened for the first time in more than six years.
The yen rise last September came as firms were ready to close their
fiscal first-half books and thus needed to show they were making
profits.
At the time, the domestic stock market was slumping and business
and consumer sentiment was already falling.
Now the benchmark Nikkei 225 stock index is holding above the key
psychological level of 10,000 despite the recent rise in the yen,
compared with just above 9,000 in early September last year. Surveys
also show that consumer sentiment has been improving in the past few
months.
And compared to the post-quake irony of the yen attracting
safe-haven buying amid investor risk aversion in March, the current
financial markets, although shaken by the European sovereign debt crisis
and the lingering U.S. debt ceiling talks, are not reacting to any
violent shock that can match the March 11 earthquake disaster.
But this does not mean government and central bank policymakers are
sitting back and relaxed.
MOF officials pointed out that while the domestic stock market has
a firm tone and the yen’s rise is relatively orderly, the public may not
like to see a continued strong yen.
Finance Minister Yoshihiko Noda said on Sunday that Japanese
authorities “will take resolute actions when necessary” in the FX
market, local newspapers reported.
He has also been warning that the recent yen rise is a “lopsided”
movement, which could be seen as a signal to dollar bears that they
could get their fingers burned if they don’t watch out.
But MOF officials would downplay the significance of those remarks,
saying the minister would always say so when market fluctuations are
one-sided or too rapid.
Meanwhile, Bank of Japan Governor Masaaki Shirakawa on Monday
warned in a speech that Japan needs to keep a close watch on the
appreciation of the yen, which could undermine the current export-led
recovery if the forex move is based on heightened uncertainties about
overseas economies.
That’s a short-term business cycle risk, and Shirakawa has been
calling for longer-term solutions by both the public- and private-sector
in order to cash in on the fast-globalizing economy and respond to
changing demands in an aging society.
In his speech, he urged firms to boost profits by exploring new
markets, not solely relying on cost reductions.
He said “it is all the more important to actively capture global
demand amid the world economy’s continuing strong growth.”
“In this regard, the expansion of firms’ overseas bases would
likely have a positive impact on Japan’s economy if it is motivated by
the aspiration for growth to strengthen their global strategies, instead
of the passive choice of giving up on Japan.”
Here Shirakawa seems to be reminding that moving operations
overseas has always been taking place, with or without a jump in the
yen’s value in the forex market.
As emerging economies have grown and Japan’s relative share in
global GDP has declined, overseas production by Japanese firms has
expanded to capture the demand for increasing consumption of locally
made products, he explained.
“In the process of continuous expansion of overseas production,
domestic offices and factories have always constituted an integral part
of international division of labor by changing their role,” he said.
Through the 1980s and 1990s, whenever the high yen made Japanese
goods more expensive overseas and trimmed repatriated dollar income,
Japanese manufacturers always bit the bullet and figured out ways to
tide themselves over, leading them to be more efficient and add value to
their products.
On March 18, a week after the massive earthquake and tsunami
wrecked northeastern Japan, the G7 conducted its first concerted forex
action since September 2000.
The concerted G7 action was expected after the yen soared to a
record high of Y76.25 versus the dollar on March 17, breaking the
previous record high of Y79.75 hit in April 1995, three months after the
Great Hanshin Earthquake hit the western Japanese city of Kobe.
tokyo@marketnews.com
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