Japan’s intervention offers little defence for yen

Japan intervened in currency markets yesterday and loosened monetary policy as it made a show of weakening the yen to protect exporters.

Yoshihiko Noda, the finance minister, told reporters on Thursday morning that Japan was acting alone in selling the yen, but was in communication with other countries over its decision. Later in the day, the Bank of Japan said it would expand its asset-buying programme by ¥10 trillion ($128 billion), taking its total size to about ¥50 trillion.

The moves followed Switzerland’s unexpected intervention on Wednesday, when its central bank cut interest rates to zero, or as close as it could get, and committed to a big round of new spending to thwart the rapid appreciation of its currency — it strengthened almost 10% in a week.

The yen’s rise had been less dramatic, strengthening from around 81 to the dollar in early July to below 77 on Monday this week. That is an unsustainable level for Japan’s exporters and put the government under pressure to help out industry by intervening.

“The government needs to be seen to be doing something,” said Russell Lascala, head of global finance and foreign exchange at Deustche Bank in Tokyo. “Japanese exporters set their hedging targets well in advance, and they are typically above 80. At 76 or 77 those targets are way off the mark.”

The central bank’s policy board wrapped up a two-day monetary policy meeting a day early yesterday as it scrambled to come up with a response in the wake of Switzerland’s action.

“After considering the recent developments in economic activity and prices ... the bank deemed it necessary to further enhance monetary easing, thereby ensuring a successful transition from the recovery phase following the earthquake disaster to a sustainable growth path with price stability,” Japan’s central bank said in a statement.

The board voted unanimously to double its investment in Japanese government bonds to ¥4 trillion, alongside a 50% increase in its purchases of discount bills (to ¥4.5 trillion), corporate bonds (to ¥2.9 trillion) and exchange-traded funds (to ¥1.4 trillion), among other measures. The board also agreed to hold policy rates to around 0% to 0.1%.

By yesterday evening, Japan’s actions had helped weaken the yen to around 80 to the dollar. However, few expect the measures to have much lasting effect without the concerted efforts of other central banks. Indeed, the yen's recent appreciation comes after Japan’s biggest-ever one-day intervention in September last year, which accompanied a monetary stimulus, and a joint intervention by the G7 after the earthquake and tsunami on March 11, when the yen hit a post-war record of just 76.36 against the dollar.

Japan’s efforts are no match for persistent global capital flows in the opposite direction. “The cause is two-fold: yen strength and dollar weakness,” said LaScala. “The yen is a stable currency when you consider European governments are struggling to fund, whereas the dollar is fundamentally overvalued considering the slowdown.”

Japan’s army of savers create a huge bid for the government’s debt, which means the country has not needed to rely on foreign creditors through its long period of slow growth, giving it the freedom to continue borrowing without worrying about its ability to fund the debt.

But the Japanese are not the only people interested in holding yen anymore. The country’s interest-rate environment, which once kept international investors at bay, is hardly much of a discouragement these days as flat yield curves and near-zero rates have become the new normal for governments around the world in the aftermath of the financial crisis.

“Almost everywhere is the same now, so you’re no longer losing out by holding yen,” said LaScala. “That means central banks that have long been underweight yen are now buying again, at the same time as they also look to diversify away from Treasuries and dollars.”

That means the yen will continue to come under pressure as long as investors continue to seek shelter from the problems in the US and Europe. With the current outlook, that means yen appreciation is probably here to stay.