By Matthew Brown and Stephen Morris - Aug 28, 2010 7:01 AM GMT+0800
Any effort by Japan to weaken the yen after it rallied to a 15-year high may fail without help from the U.S. and the European Union, currency strategists say.
Speculation that Japan may intervene in the foreign- exchange market rose after Prime Minister Naoto Kan said Aug. 27 the government is ready to take “bold” action. Following his comments, Barclays Capital economists said in a report that “intervention appears imminent.”
Japan would need coordinated help to depreciate the yen, and that’s unlikely because the U.S. and Europe want their currencies to stay relatively weak to help bolster exports and keep their own economic recoveries afloat. Intervention by the Swiss National Bank couldn’t prevent the franc from appreciating to a record high against the euro this year.
“Actions by the Bank of Japan unilaterally probably wouldn’t change sentiment over the medium term,” said John McCarthy, director of currency trading at ING Groep NV in New York. “If they somehow manage to get the European Central Bank and the U.S. Treasury to concur and to assist in their efforts, that certainly would make a difference. But I don’t see that happening at all.”
The yen closed the week at 85.22 per dollar, after reaching 83.60 on Aug. 24. It’s up 9 percent this year against the greenback and 22 percent versus the euro, closing at 108.72. It rallied to an all-time high of 79.75 to the dollar in April 1995, before weakening to 124.13 in June 2007.
‘Bold Measures’
“Volatile movements in the currency market have a negative impact on economic and financial stability,” Kan told reporters after speaking to business executives in Tokyo. “We are ready when necessary to take bold measures.”
Forty percent of Japanese manufacturers would relocate factories and development sites abroad if the yen continues to trade at 85 to the dollar, a survey conducted from Aug. 11 to Aug. 24 by the Ministry of Economy, Trade and Industry found.
The number of companies saying profits will decline because of the yen’s strength rose to 65 percent from 16 percent in a May survey, when the currency was trading at 90 yen to the dollar. More than 50 percent said they would see a drop in earnings from the yen’s strength against the euro.
“I want Tokyo to hear our wailing,” Suzuki Motor Corp.’s Chairman Osamu Suzuki told reporters on Aug. 26. “Something needs to be done to prevent Japan from sinking. Frankly speaking, that’s how I feel. All we can do is to keep asking for help. I spend every day feeling anxious about this.”
Last Intervention
Japan hasn’t intervened in the currency market since March 2004, when the yen traded at about 109 per dollar. The Bank of Japan, acting on behest of the Ministry of Finance, sold 14.8 trillion yen ($175 billion) in the first three months of 2004 following record sales of 20.4 trillion yen in 2003.
The action failed to keep the currency from rising to 102.63 to the dollar by the end of that year.
Yen has strengthened in recent months as concern that the global economic recovery is faltering undermined the carry trade in which investors borrow in the Japanese currency and then take the proceeds out of the country to invest in nations with higher interest rates. Investors using the carry trade lost 4.4 percent this year, according to indexes compiled by Royal Bank of Scotland Group Plc.
The Bank of Japan may be deterred from intervening alone after the Swiss National Bank failed to prevent the franc from appreciating almost 12 percent to a record high against the euro this year, according to Bilal Hafeez, managing director and head of currency strategy at Deutsche Bank AG in London.
Raising Forecast
“It’s very unlikely the U.S. would be on board because the Americans have been pressuring the Chinese to stop intervening in the yuan on the one hand, so they can’t allow the Japanese to intervene on the other,” he said. Last week, Deutsche Bank raised its yen forecast, predicting the currency would reach 80 per dollar by year-end and 78 during the first quarter of 2011.
U.S. lawmakers have accused China of keeping the yuan’s exchange rate artificially low to gain an unfair trade advantage. Treasury Secretary Timothy F. Geithner said Aug. 4 he will “watch closely” how much the yuan is allowed to gain after saying the previous month the currency was undervalued.
The pressure on Bank of Japan Governor Masaaki Shirakawa to intervene comes as Kan faces intra-party competition from his most powerful rival. Ichiro Ozawa, who was forced him to step down in June as the Democratic Party of Japan’s No. 2 official because of a campaign funding scandal, said he will run against Kan in the Sept. 14 election for party president. The party’s majority in the lower house of parliament ensures that its leader becomes prime minister.
Futures Bets
Two government reports this week showed that Japan’s economic recovery is in jeopardy of derailing. Consumer prices fell for a 17th month and household spending rose less than forecast. The benchmark Nikkei 225 Stock Average is down more than 20 percent from this year’s high, a drop that some investors say constitutes a bear market.
“Just because it isn’t a sensible policy, doesn’t mean it’s not going to be used,” said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London, regarding the potential for intervention. “You have to remember the pressure that they’re under, which is intense at the moment.”
Futures traders have boosted bets that the yen will rise. The number of contracts hedge funds and other large speculators hold at the Chicago Mercantile Exchange betting on a gain rose to 51,069 as of Aug. 24 from a net short position of 65,612 contracts in May, according to Washington-based Commodity Futures Trading Commission data.
To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Stephen Morris in London at smorris39@bloomberg.net
From Bloomberg published on Aug 28, 2010 7:01 AM GMT+0800