Tokyo: Japan kept firing warnings to currency markets on Wednesday while the yen climbed towards record highs and past levels that triggered last week’s intervention as investors braced for protracted dollar weakness.
Japanese finance minister Yoshihiko Noda said he would continue to communicate closely with group of seven (G-7) nations about exchange rates, a possible hint that Tokyo might be testing the ground for another round of yen selling.
Japan’s Prime Minister Naoto Kan also said he was aware of concerns that the strong yen could prompt more companies to shift production overseas, although he declined to comment on what would be a desirable exchange-rate level.
The Japanese currency was trading at around 76.66 against the dollar, close to a four-month high of 76.29 yen hit before Tokyo sold a record of about ¥4.5 trillion on 4 August.
The US Federal Reserve’s extraordinary pledge on Tuesday to keep rates near zero for two years added to the buying pressure on the yen as investors geared up for a long period of dollar weakness.
Japanese officials fear that the yen’s strength may derail the economy’s recovery from a recession caused by the 11 March earthquake and tsunami, and a nuclear power crisis triggered by meltdowns at a crippled plant.
“Recent one-sided yen rises would have a negative impact on Japan’s economy just emerging from the damage of the earthquake,” Noda told parliament on Wednesday.
Even as Noda hinted at G-7 talks, market players doubted Tokyo would garner much sympathy for its efforts to stem a broad trend driven mainly by growing concerns about the health of the US economy.
“Markets are less on alert but are starting to wonder whether the authorities would be able to intervene again as US and European authorities likely are not supportive,” said Masafumi Yamamoto, chief FX strategist at Barclays Capital.
“Japanese policymakers had complained that the yen’s level was too high before the intervention. So they would naturally act now.”
While the yen kept policymakers on edge, a rebound in Tokyo stocks after a Fed-inspired Wall Street rally offered some relief as Japanese officials view the stock market as another key element affecting business and consumer sentiment.
The government raised its assessment of the economy for the first time in two months, acknowledging that factory output has recovered from the natural disasters earlier this year. Still, the government’s alarm over a sputtering US economy and the impact on currencies remains high.
“The US economic slump may impact Japan by causing wide foreign exchange moves,” economics minister Kaoru Yosano said.
“Of course, big foreign exchange fluctuations would affect Japan’s economy ... It is also feared to reduce Japan’s trade with the United States.”
The yen hit an all-time high of 76.25 shortly after the March earthquake on market talk of repatriation of huge funds by Japanese investors, sparking a rare joint G-7 intervention in a show of solidarity with the disaster-struck nation.
Are others ready to move?
Tokyo has said a G-7 call for coordinated action to ensure market stability, made in a statement issued on Monday, was meant to signal the group’s readiness to jointly intervene in the market if currency moves become too volatile.
But markets doubt the United States and European countries are ready for such a move, pointing to a phrase in the G-7 statement saying exchange-rates should be determined by markets.
Some in markets even suspect that major countries were not happy with Japan’s solo intervention, after ECB President Jean-Claude Trichet said that currency interventions “have to be made on the basis of a multilateral consensus.”
Japan’s top government spokesman suggested Tokyo may propose steps aimed at helping firms most affected by the yen’s strength.
“We do not view currency moves as the yen’s appreciation but the dollar’s weakness, led by factors in overseas economies and not by factors in Japan,” chief cabinet secretary Yukio Edano told reporters.
“We need to consider measures in terms of safety nets for affected people, rather than the economic stimulus, to make them effective.”
Economists expect the world’s third-biggest economy will grow 1.2% in the current quarter and expand moderately thereafter, following third straight quarters of contraction.