TOKYO - Japan's concern to maintain relations with the United States, its
closest ally, on an even keel means Tokyo will seek to allow its currency to
continue its steady appreciation, despite the profit erosion this causes in the
key exporting sector.
The Ministry of Finance (MoF) may refrain from selling the yen, say currency
strategists, even after the currency has advanced to the highest in 13 years
against the US dollar and as many of the country's biggest exporters struggle
to maintain profit margins.
The yen has advanced 24% versus the US dollar this year, 32% against the euro
and 60% against the pound sterling. It traded at 90.25 against the dollar and
123.40 per euro at 5:45pm in Tokyo on
Tuesday. It may reach 80 per dollar in one or two months, forecast Toru
Umemoto, chief currency analyst in Tokyo at Barclays Capital.
Japan will be criticized internationally, especially by the US, the country's
strongest ally, if it acts to stem the currency's gain as US automakers are
still on the brink of bankruptcy, said Umemoto. The stronger yen drives up the
price of cars imported to the US.
The US Senate rejected a rescue plan for Detroit-based GM and Chrysler last
week, and hopes for the companies now hinge on the George W Bush administration
dipping into the Treasury Department's US$700 billion fund set up to rescue the
financial industry.
The yen rose to 88.10 against the dollar on December 12, its strongest level
since August 1995, as investors fled to the safe haven of the Japanese
currency.
"I expect there will be no foreign exchange intervention," Umemoto told Asia
Times Online. "It should be very hard for Japan to undertake intervention,
because such an act would be regarded as lending some help to Toyota vis-a-vis
the Big Three [US carmakers]. Politically it's simply unfeasible."
Even so, the strengthening yen is taking its toll of Japan's exporters, who are
threatening to move plants offshore to maintain sales. That could further add
to the country's mounting number of people without work. The unemployment rate
"may break the existing record of 5.5% and more than 1 million people might
become jobless", Labor Minister Yoichi Masuzoe was quoted as telling a meeting
of public employment security officers of the Ministry of Health, Labor and
Welfare last Friday, according to a Kyoto report.
Japan posted a 63.9 billion yen trade deficit in October, the first red ink
figure for the month in 28 years, as a stronger yen made Japanese exports more
expensive in dollar or euro terms, according to data released by the Ministry
of Finance on November 20.
Japanese exports declined 7.7% from a year earlier in October, the worst fall
since December 2001. Japan's trade surplus with the US fell 27.5% to 519.2
billion yen, down for the 14th straight month, while the trade surplus with the
European Union fell 24.8% to 357.4 billion yen, down for the second month in a
row.
Should the Japanese currency rise by just 1 yen against the dollar and the
euro, Sony Corp would lose 4 billion yen and 7.5 billion yen, respectively.
Toyota Motor Corp has also said if the yen appreciates a similar amount, it
would lose 40 billion yen to 60 billion yen on an annual basis, respectively.
Nissan chief executive Carlos Ghosn on Monday told reporters the sharp
appreciation of the yen "is very dangerous. If the current situation continues,
companies will be forced to move production offshore."
The gain nevertheless pleases some Japanese consumers, as imported goods and
holidays to such popular destinations as South Korea become cheaper.
The Japanese yen has been the biggest winner out of the current global
financial meltdown as investors increasingly unwind the so-called yen carry
trade, in which yen borrowed at Japan's ultra-low interest rates are changed
into other currencies and invested for higher yields than the interest charged
on the yen loan. Japan's interest rate is 0.3%, the lowest among industrialized
economies.
Narrowing interest-rate gaps between the Japan and other nations have helped
accelerate the reduction of yen carry trades. The US Federal Reserve has cut
rates to 1.0% from 5.25% in nine steps over the past 15 months to counter a
credit crisis that started with the collapse of the US mortgage market and
which has spread around the world. The US central bank is widely expected to
cut rates by at least a half-percentage point on Tuesday. The European Central
Bank has slashed rates to 2.5% by 1.75% since October.
The Bank of Japan has trimmed the key overnight lending rate only once in the
past seven years - to 0.3% from 0.5% in October - and has little room to lower
it much further.
Japan's monetary authorities haven't stepped into the currency market since
they sold a record 14.8 trillion yen in the first three months of 2004. The
central bank hasn't purchased yen since 1998.
Calls for less interference in currency markets from the Group of Seven
industrialized nations, especially targeting China, have made it difficult for
the Japanese authorities to justify any intervention in recent years. In Japan,
the Bank of Japan conducts foreign exchange intervention operations, based on
decisions by the minister of finance.
If the Japanese monetary authorities were to intervene, it would be more out of
concern for the plunging stock market that a surging yen has triggered, said
Masafumi Yamamoto, head of foreign-exchange strategy for Japan at the Royal
Bank of Scotland Group Plc.
"Should the decline in stock market prices and the appreciation of the yen keep
happening simultaneously, the Japanese monetary authorities are highly likely
to engage in a smoothing operation to slow the yen's appreciation," said
Yamamoto, who expects the yen to rise to 85 a dollar in one or two months.
On Friday, when the yen advanced to a 13 year-high, the 225-issue Nikkei Stock
Average lost 484.68 points, or 5.56%, from a day earlier to 8,235.87. This
closing price was much higher than a year-to-date low of 6,994.90 hit on
October 28, making Tokyo's currency intervention less likely for the time
being, Yamamoto said.
Verbal intervention
Top Japanese Finance Ministry officials such as Naoyuki Shinohara, vice finance
minister for international affairs, have expressed concern about the sharp rise
in the yen.
"We will take appropriate action in response to the situation [in the currency
market]," Shinohara told reporters after the yen broke through 90 a dollar.
Finance Minister Shoichi Nakagawa, a champion of conservative causes who is
well aware of international political circumstances, said on the same day the
government had no immediate plans to intervene.
Describing the dollar's fall below 90 yen for the first time since 1995 as
"shocking", Nakagawa told reporters, "We will keep watching the markets,
particularly the foreign exchange market, with great interest."
"Japan's MoF officials said they would watch markets with 'great interest',"
Nizam Idris, a currency strategist in Singapore at UBS, wrote in a research
note published on Monday. "We however expect this 'interest' to translate to
more verbal interventions rather than a physical one for now."
One-month implied volatility for the dollar-yen fell to 21.5% on Tuesday, from
41.79% on October 24, indicating investors see less price fluctuation in the
currency pair next month. Dealers quote implied volatility, a gauge of
expectations for currency moves, as part of pricing options. A drop in
volatility reduces the risk of the carry trade by making profits easier to
predict.
"Financial authorities most fear a market crash, which brings about excessive
volatility," said Yuji Saito, head of the foreign-exchange group in Tokyo at
Societe Generale SA. "Falling volatility suggests the Japanese government does
not need to intervene to prevent the yen from appreciating too quickly."
Japan's currency may rise to 80 per dollar in one or two months, Saito said.
Kosuke Takahashi is a Tokyo-based journalist. He can be contacted at
letters@kosuke.net
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