Japan Intervenes for First Time Since 2004 to Rein in Yen

Bloomberg--Japan intervened in the foreign- exchange market for the first time since 2004 after a surge in the yen to the strongest against the dollar in 15 years threatened to stunt the nation’s economic recovery. Finance Minister Yoshihiko Noda told reporters in Tokyo that the move was unilateral. Chief Cabinet Secretary Yoshito Sengoku said the ministry “seems to think” 82 yen per dollar to be the line of defense, after it reached 82.88 earlier today. Government officials speaking on condition of anonymity have previously said volatility was a bigger concern than the level.

Prime Minister Naoto Kan was under pressure to intervene after business leaders’ calls for steps to arrest the yen’s gains, which undermine the exports propelling Japan’s growth. It may do little for the economy because Japan alone won’t be able to keep the yen from rising, said analyst Tohru Sasaki. “In the medium-term it can’t change the overall direction” of the currency, said Sasaki, head of Japan rates and foreign- exchange research in Tokyo at JPMorgan Chase & Co., who yesterday said intervention odds had doubled after Kan’s reelection as head of Japan’s ruling party.

The yen tumbled 2.1 percent to 84.85 per dollar as of 12:42 p.m. in Tokyo, after reaching a high of 82.88 earlier today. The benchmark Nikkei 225 Stock Average climbed 2.6 percent to 9,543.38. The currency had climbed more than 13 percent against the dollar in the five months through yesterday.

Yen’s Climb

Japan’s currency has rallied amid concern about the durability of the U.S. recovery and the effect of Europe’s debt woes. The yen typically gains when investors avoid risk because of the country’s current-account surplus and deflation. Authorities probably decided to intervene today because the yen’s climb yesterday and overnight was due to traders’ views that Kan wouldn’t take such a step, said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. Kan’s opponent to head the Democratic Party of Japan, former DPJ chief Ichiro Ozawa, had specifically called for yen sales.

It’s “pretty unlikely” officials will be able to return the yen to the level “that companies are basing their profit forecasts” on, Nishioka also said. Firms said they remain profitable as long as the yen trades at 92.90 per dollar or weaker, according to the Cabinet Office’s annual report released in February.

‘Bold’ Pledge

“Investors were starting to doubt the government’s commitment to its pledge that it would take bold action,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. Kan and Noda in recent weeks repeatedly said that Japan was ready to take “bold” measures to stem the currency. U.S. Treasury spokeswoman Natalie Wyeth declined to comment on Japan’s announcement when reached by telephone. China’s Ministry of Commerce also declined to comment. For China, Japan’s decision is a “favorable development,” said Tomo Kinoshita, co-head of Asia Economic Research at Nomura Holdings Inc. in Hong Kong. China has limited gains of its own currency to less than 2 percent since ending a two-year peg to the dollar in June. U.S. lawmakers have criticized China’s currency policy for providing a subsidy to the nation’s exporters. The House Ways and Means Committee is scheduled to hold a hearing on the subject today in Washington.

Record Sales

Japan hadn’t intervened to sell yen in the foreign-exchange market since 2004, when the yen was around 109 per dollar. The Bank of Japan, acting on behest of the Ministry of Finance, sold 14.8 trillion yen in the first three months of 2004, after record sales of 20.4 trillion yen in 2003.Noda didn’t say how much was used in today’s action, while that figure will be released at a later date. “We can’t overlook these movements that could have a negative effect on the stability of the economy and financial markets,” Noda said. “We conducted intervention to contain excessive movements in the currency market. We will continue to watch developments in the market carefully and we will take bold actions including further intervention if necessary.” Bank of Japan Governor Masaaki Shirakawa said in a statement that the action should “contribute to a stable foreign exchange-rate formation.”

Until now, the government has pressed the Bank of Japan to step up liquidity injections to help address the gains in the yen. The central bank last month increased a credit program by 10 trillion yen ($119 billion) after an emergency meeting. The step had little impact on the currency.

Business Calls

Top business executives have been calling for government action to stem the yen’s rise. “We want verbal or actual intervention if the yen appreciates more than the current level,” Hiromasa Yonekura, head of Japan’s Keidanren business lobby, said at a Sept. 13 press conference. “Rapid change should be managed,” Hiroaki Nakanishi, president of Hitachi Ltd., said this week in Tokyo. Some analysts have said that official action by Japan might not weaken the yen for long unless it’s conducted together with overseas authorities. Kan said last week in a debate with Ozawa that getting international cooperation to halt the yen’s rise is “difficult.”

U.S. Treasury Secretary Timothy F. Geithner declined to comment about the prospects for currency intervention in an interview last week, instead saying that Japanese officials should do what they can to help their economy grow. “They’re working through some difficult problems,” Geithner said on Bloomberg Television. “My view is they should be focusing like we are on how to make sure they’re reinforcing recovery in Japan and doing things that are going to help.” Recent Japanese data have pointed to the expansion losing momentum. The government yesterday revised its July industrial output figures to show that output fell rather than increased from a month earlier. Japan’s economy expanded at a 1.5 percent annual rate in the second quarter, less than half the pace of the previous period, and consumer confidence slid to a four- month low in August.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net;