Japan Launches Campaign to Weaken Yen

TOKYO—Japan moved to tackle one of the biggest challenges facing its weakened economy Thursday with a concerted push by both the government and the central bank to bring down the surging yen.

But the staying power of this latest intervention may be limited, as past moves suggest Japan's currency could resume its march higher and continue to hobble its export-driven economy. Furthermore, the yen is just one of many woes facing a Japanese economy that some economists say is key to global growth amid lackluster indicators in the U.S. and Europe.

Japan intervened in the currency market continuously Thursday, selling an undisclosed amount of yen to keep it from reaching new highs. Traders as of Thursday afternoon local time estimated that Japan had spent just under ¥1 trillion, or $12.4 billion. Though market watchers had speculated that other Group of Seven nations might join a long-expected intervention, Tokyo said it acted alone.

Bolstering the government measures, the Bank of Japan said it would pour another ¥10 trillion into the economy through additional easing measures, adding to the central bank's continuing efforts to buy financial assets including government and corporate debt to improve investor sentiment and push down rates. While not directly aimed at foreign exchange rates, adding more money to an economy tends to push down its currency.

By midday European trading the dollar had risen to about ¥80 from ¥77.06 in New York Wednesday. The dollar reached its post-World War II low of ¥76.25 on March 17 following that month's massive earthquake and tsunami.

Japan Finance Minister Yoshihiko Noda hinted Thursday that the government will intervene further if necessary. "We are still [only] halfway through, so I'll sum up the result after this is over," he said.

Some market watchers predicted a long campaign. "What we've seen is a skirmish in what could become a war of attrition," said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney.

Kazuo Hirai, who oversees Sony Corp.'s electronics and videogames business, cheered the move to slow the yen's sudden rise. "The fact that the government intervened in a market where the changes were so rapid is a good thing for Japanese industry as a whole," he said during a meeting with reporters. Added Hiromasa Yonekura, chairman of major business group Nippon Keidanren, "the currency intervention seems slightly late, but [the government] has done well."

Japan's main stock-market benchmark rose 0.2%.

Thursday's currency intervention was the third time in less than a year that the Japanese government has moved to address the strong yen, which makes Japan's key export sector less competitive abroad. But the yen has continued its climb despite Japan's solo intervention in September and a combined G-7 effort that followed the devastating March 11 earthquake and tsunami.

Demand for yen has remained strong despite Japan's massive public debt—which is about twice the size of its gross domestic product—and weak growth prospects. The Bank of Japan's emphasis on near-zero rates and a stable monetary policy make the currency look like a safe haven, drawing investors. Meanwhile, Japanese exporters generate demand by repatriating overseas earnings.

Furthermore, the U.S. and Europe have slashed interest rates to stimulate growth, narrowing the spread between their rates and traditionally low-yielding Japan. That makes dollar-denominated bonds less attractive for global investors.

"I am fairly skeptical about the long-term efficacy of this intervention," said Yunosuke Ikeda, chief forex strategist at Nomura Securities Co. "It all depends on U.S. economic fundamentals and those show no signs of getting out of a soft patch—in fact, the U.S. economy may be in a sticky patch."

To be sure, domestic demand is expected to rise sharply over the next six months as post-quake reconstruction moves into high gear and Japanese consumers shake off their sense of self-restraint. In some quarters, expectations for a V-shaped recovery are key to global growth. "Our call that the global economy will accelerate this summer leans heavily on a strong bounceback" from Japan, J.P. Morgan said in a July 21 report.

Currency appreciation is particularly painful for the Japanese economy because manufacturing still makes up 20% of total economic output, just above Germany's 19% ratio and well above the 13% level in the U.S., according to United Nations data. But Japanese manufactures have become experts at adapting to yen strength by boosting productivity at home and moving more production abroad.

Sony, for example, has sought to offset the high value of the yen by moving more of its cost base to countries where it receives large amounts of revenue, such as the U.S.

However, the appreciating yen still hurts Sony's competitiveness with Korean rivals such as Samsung Electronics Co. and LG Electronics Co. Nomura Securities economist Takahide Kiuchi projects that a rapid 10% jump in the yen during the current fiscal year through March would slash average pretax profits at Japanese manufacturers by 18%.

It has also chipped away at Japan's traditionally fat trade surpluses, once the source of great friction with its trading partners. In the March-June quarter, Japan posted a trade deficit of ¥1.25 trillion, which was the second largest since 1957, according to Nomura Securities.

 

—Megumi Fujikawa, Tatsuo Ito and Andrew Monahan contributed to this article.