Japan Shows Concern as Dollar Slides

Japan Shows Concern as Dollar Slides
By BETTINA WASSENER and HIROKO TABUCHI
Copyright by The New York Times
Published: November 26, 2009
http://www.nytimes.com/2009/11/28/business/global/28iht-dollar.html?hpw


HONG KONG — Japanese policy makers on Friday became increasingly vocal about the strength of the yen after the Japanese currency hit a 14-year high against the dollar, fueling speculation that the government may step into the market to artificially weaken the currency.

The dollar briefly fell to 84.82 yen — surpassing Thursday’s low and prompting the country’s finance minister, Hirohisa Fujii, to tell reporters in Tokyo Friday that he was “extremely nervous and watching the market carefully.”

“There’s no doubt the market has moved too far in one direction,” Mr. Fujii said. “Moves right now are extreme, and it would be possible to take appropriate measures.”

Although he did not explicitly say that the government might intervene in the foreign exchange markets — by buying dollars for yen — such comments are often interpreted as “verbal intervention,” in which comments from top policy makers can swing market expectations and thus influence currency levels.

By mid-morning in Tokyo, the dollar gained somewhat, to 85.90 yen, but it remains weak in comparison to earlier this year. In April, it took $1 bought 101 yen, and at the start of 2008, $1 bought nearly 110 yen.

The dollar’s slump against the yen, and against many of the world’s major currencies, is part of a wide, multiyear decline, set off by worries about the U.S. economy and its swelling debt — and more recently, a belief that the United States was unlikely to raise interest rates soon.

The dollar’s weakness is especially causing jitters in Japan, whose economy is still struggling to emerge from a deep recession. A strong yen — which makes exporters’ good more expensive for consumers in the United States — is something Japan’s export-oriented economy can ill afford.

The Nikkei 225 stock index in Tokyo dropped 1.8 percent on Friday morning, led by exporting giants like Sony, Toshiba, Toyota, Nissan and Honda.

Earlier this decade, Japan frequently intervened in currency markets to weaken its currency, thereby keeping its exports affordable for overseas markets.

But Japan has held back from similar moves amid increasing signals from Washington that Asia’s export-driven economies should no longer count on American consumers to keep them afloat.

In a research note on Friday, Patrick Bennett, a strategist at Société Générale in Hong Kong said he still expected “some ratcheting higher in tone before physical action is taken.”

On a recent trip to the region, President Obama urged countries like Japan and China to cultivate domestic demand instead, while allowing their currencies to appreciate against the dollar.

Mr. Obama is concerned by what economists call a global imbalance: a huge trade and current-account deficit in the United States and trade surpluses in the rest of the world. The president said Americans must spend less on imported goods — and increase their household savings — while consumers in Asia must spend more.

“It was just two weeks ago that U.S. President Obama stressed the necessity for the United States to reduce its trade deficit, and for Asian countries to grow domestic demand,” Osamu Takashima, an analyst at the Bank of Tokyo-Mitsubishi UFJ, wrote in a note to clients. “International circumstances make it difficult for the Japanese government to halt the yen’s rise by intervening in currency markets.”

The slump in the dollar, so soon after Mr. Obama’s visit, is putting the Japanese government to the test, however. Japan has not meddled in currency markets since 2004, but the recent trend upward had prompted speculation that an intervention might be imminent.

“It’s not desirable for the currency to move so rapidly,” Prime Minister Yukio Hatoyama told reporters Thursday. “The most important thing is we must handle economic management properly. Immediate steps will be needed to avoid falling back into recession.”

A weak dollar hurts Japanese exporters because American consumers must pay more to purchase the same Japanese cars and gadgets — making them less competitive alongside products made in the United States or by other exporters with weaker currencies. Any profit earned in American dollars will also be worth less when converted into yen, hurting companies’ bottom lines.

Automakers like Toyota Motor, which still makes many of its cars in Japan to ship overseas, could be hit if the dollar remains weak. Toyota, the world’s biggest automaker, estimates that a 1-yen fall in the dollar shaves 30 billion yen off its operating profit.

Japanese exporters have already been battered in the global economic crisis, which decimated demand worldwide. Meanwhile, a dark outlook for the country’s export sector could in turn depress share prices and business sentiment, worsen deflation and weigh on the wider economy — just as Japan has been showing signs of recovery.

“If the situation continues to worsen at export companies, it could nip the Japanese economy’s green shoots in the bud,” said Mr. Takashima, the bank analyst.

The last time the dollar fell so low against the yen was in 1995, amid the lingering effect of the agreement known as the Plaza Accord a decade earlier, when the world’s leading economies agreed on a common policy to weaken the dollar and tackle America’s trade deficit.

But near-zero interest rates set by the Japanese government for much of this decade encouraged the rise of the so-called yen carry trade, where investors borrowed money in Japan to invest in countries with higher yields.

Those carry-trade bets helped keep the yen cheap against other currencies, including the dollar. Exports boomed, and Japan racked up a huge trade surplus.

The carry trade started to unravel in 2007 as subprime worries spread in the United States, causing panicked investors to pull their money from riskier investments and pay off their yen loans.

Meanwhile, the United States Federal Reserve has lowered interest rates to below those of Japan, and analysts see little prospect of a rate increase soon, making the dollar a less attractive currency to hold. A dollar carry trade is also in the making, analysts say.

Tomoko Fujii, a currency strategist at Bank of America Merrill Lynch, said she saw an increased chance that Japan would intervene in currency markets if the dollar dipped below 85 yen.



Hiroko Tabuchi reported from Tokyo.