Tokyo intervened in the foreign exchange markets for the first time in six years this week. It sold yen and bought dollars to lower the currency’s value against the greenback – at ¥82 it had reached a fresh 15-year high. The strong yen threatens to undermine Japan’s export-led recovery. A weaker one would also bolster import prices and thus help tackle persistent deflation. The yen fell by 2.6% on the move. Earlier this week, prime minister Naoto Kan survived a leadership challenge. Had he lost, Japan would have had its sixth prime minister in four years.
What the commentators said
This was partly a political move to bolster Kan’s domestic power base, said Lex in the FT. Adopting one of his opponent’s “flagship policies” – Ichiro Ozawa had been seen as more gung-ho about intervention – helped him “reach out” to those who didn’t vote for him.
So what are the chances of intervention working? Last time round, between January 2003 and March 2004, all it did was slow the pace of appreciation. The trouble is that the global forex market is so huge that “no one can control the market trend”, said JPMorgan’s Junya Tunase. If Japan could act in concert with other countries its chances would improve. It’s a pity everyone else wants a weak currency too. Further monetary easing measures might help if they can entice money into riskier assets and out of yen. But it’s not clear that Kan can persuade the Bank of Japan to go down this road, said Ian Campbell on Breakingviews.
Given that the yen’s strength is largely a question of global risk aversion and fears over the US economy, Japan’s best hope is an upsurge in confidence in the US. But as long as there is talk of more quantitative easing, said Lex, that scenario is “unequivocally off”.