TOKYO, Japan — The U.S. called it “deeply disturbing;” the eurozone said it was “not welcomed.” Yet this week’s currency intervention by Tokyo — its first for more than six years — was sparked by a force as irresistible as the global malaise that has sent the Japanese currency to 15-year highs against the dollar.
As Japan’s finance minister pleaded for “global understanding” of the decision to spend almost $22 billion buying dollars and selling yen on Wednesday, the prime minister, Naoto Kan, was playing to the gallery at home.
“We are determined not to allow the drastic fluctuation of the yen,” Kan told business leaders. "If rapid fluctuations in the yen harm Japanese firms' appetite for investing at home, and push them to shift their factories overseas, that could further worsen job conditions and affect our efforts to overcome deflation.”
Long before it parked itself in 83 yen-dollar territory earlier this week, the yen’s appreciation had caused jitters among Japanese manufacturers. Signs of a slowdown in exports to the vital U.S. and China markets have magnified those concerns, as Japan struggles to reach anything approaching a sustainable recovery.
Given the domestic context, this week’s move — Japan’s biggest single-day intervention on record — had an inevitability to it. Kan, and his only rival for the presidency of the Democratic Party of Japan in Tuesday’s leadership election, Ichiro Ozawa, had spent the run-up to their showdown trading barbs over economic policy.
Ozawa, who was soundly beaten by Kan in the vote among party lawmakers and members, was seen as the champion of Forex meddling. But having won the overwhelming support of his party, Kan waited less than 24 hours to show his mettle, instigating the first currency intervention since 2004.
“This was done for purely domestic reasons,” Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo, told GlobalPost. “Intervening is the only decisive thing any Japanese prime minister can do to help the economy right now. Everything else needs to go through parliament. Kan’s close ties to the finance ministry definitely helped him. Domestically speaking, this all went rather smoothly.
“At the very least, it will give Japanese companies a window in which to repatriate profits from overseas. If your profits sink because of the exchange rate, you feel the heat immediately. That’s why companies welcome this move, and why it will be good for Kan and good for his cabinet.”
Early indications are that the move has had the desired effect: the yen has lost more than 3 percent of its value since Wednesday, although few analysts believe the move will have a lasting impact on exchange rates. That was the case during Japan’s last attempt to manipulate its currency, from January 2003 to March 2004, when it spent 35 trillion yen, but with mixed results.
Kan will have been cheered by the immediate reaction at home. "We want the government and the Bank of Japan to continue taking strong action to reverse the yen's strength," Toshiyuki Shiga, chairman of the Japan Automobile Manufacturers Association, told reporters.
The Nikkei business daily said the intervention was “reasonable” given the risk the strong yen poses to Japan’s export-led recovery. “Both the U.S. and Europe have been allowing their currencies to weaken, hoping tat strong exports will power their economies,” the paper said. “That is why Japan had to act alone.”
There was less support in the U.S. and Europe, which accused Tokyo of succumbing to the predatory exchange rate policy seen elsewhere in Asia, not least in China. The eurozone has communicated its disapproval to Tokyo, while U.S. congressman Sander Levin, who chairs the house ways and means committee, described the unilateral intervention as “deeply disturbing.”
The currency move came just as Washington was ratcheting up the pressure on China to strengthen the yuan. To succeed, the U.S. needs other Asian economies to be on message, and by Washington’s reckoning, Japan has let the side down.
The finance minister, Yoshihiko Noda, defended the move, saying it had been designed to give the economy room to breathe.
“I am aware that there are various opinions,” he said. “But Japan’s stance is that a prolonged yen rise is undesirable as the economy remains in a severe situation with deflation. It is important that we explain our stance to the international community.”
The consensus in Japan is that the fuel for the yen’s journey to the currency stratosphere came from sources beyond its own shores. Persistent fears about the US and European economies have kept the currency high, eating into corporate earnings, feeding deflation and dragging the Tokyo stock market into a semi-permanent torpor.
If history is any indication, this could have been just the first salvo in Japan’s long battle with international currency markets. It will not go down well with its trading partners, but for now Kan would rather endure a distant bout of whingeing than foment vitriol in his own backyard.