For a septuagenarian, Japan’s new finance minister, Hirohisa Fujii, packs a punch, single-handedly driving up the yen on Wednesday – his first day on the job.
As the FT reported on Thursday, the yen surged to a seven-month high against the dollar of Y90.16 on Wednesday after unusually emphatic comments from Japan’s incoming finance minister calmed fears that Tokyo would intervene to stem the currency’s recent rise.
Asked whether he was opposed to currency intervention, Fujii, unhesitating, shot back: “In principle, yes. Such actions can destroy a free economy.”
The yen settled above Y91 overnight before creeping back to Y90.70 on Thursday afternoon Tokyo time. For the short-term, anyway, the yen seems to be on an upward trend.
So what comes next – for both the yen and the dollar?
Japan, as the FT report reminded us, has not intervened in the currency markets since the Bank of Japan, on behalf of the finance ministry, sold a record Y14,800bn ($160bn) in the first quarter of 2004 to weaken the currency.
But speculation has grown in recent weeks that Japan will move to help its exporters and step in to weaken the yen as it rose rapidly towards the Y90 level against the dollar.
However, analysts say, Fujii’s comments suggest the new government will be less interventionist than its predecessor.
JPMorgan’s chief currency strategist in Tokyo, Tohru Sasaki, agreed in a mid-week note:
Many market participants are worrying that the new government may overlook yen appreciation or even adopt a ‘strong yen policy’ because of various comments against intervention or in favour of a strong yen from senior DPJ politicians, including Fujii.
He continued:We think there will be some risk that we will see comments in favour of JPY strength from DPJ politicians, including new finance minister Fujii, and see a knee-jerk reaction of higher JPY. But such JPY appreciation should be shortlived. We believe Japan’s FX policy will not change significantly under DPJ. Indeed, the DPJ does not desire strong JPY, but they believe the currency value should be determined in a competitive, open marketplace based upon economic fundamentals.
Sasaki and his team rated the possibility of Japan intervening on the yen at 5 per cent under the previous, LDP government. Now, he gives the possibility of Japanese intervention less than 3 per cent under the DPJ government, “which means a little less possibility but not a significant difference”.
In fact, he says, the DPJ-led government is unlikely to intervene “even if USD/JPY breaks Y87″. Of course, he adds, if the G7 countries become seriously concerned about a weak dollar and decide to conduct co-ordinated intervention, Japan is likely to participate. “But a unilateral intervention by Japan continues to be highly unlikely”.
However, there are two key “risk factors”, noted Sasaki:
The first one is the prospect of escalating friction between the Japanese and US administrations. In such a case,
USD/JPY will suffer significant downward pressure like in the early 1990s, “although we put relatively low probability on this scenario”.
The second risk factor is the prospect that Japan will shift some foreign reserves from dollars to euros. Already, noted Sasaki, one senior DPJ member, Masaharu Nakagawa (a former party spokesman), has expressed concern over the concentration of reserves in dollar-denominated assets. A shift, therefore, “cannot be ruled out.”
While Japan’s new government clearly opposes currency intervention for now, Jennifer Hughes asks in the FT’s Short View column on Thursday couldJapan could its non-intervention promise if the yen appreciated further?
Exporters are at present operating on an assumption of the dollar at Y95. The currency at nearer Y90 would be painful, but not fatal, she added. But if the dollar were to drop sharply from here, triggering yen buying and pushing the Japanese currency higher against its other trading partners too, it would mean much greater pain for exporters.
As Hughes concluded:
The government has pledged to reduce Japan’s export dependency. That is a long-term goal. In the short term, politicians should brace for growing pressure from those same exporters.
Related links:
The new carry currency? – FT Alphaville
What being like the yen means for QE currencies – FT Alphaville
Samurai-ed: Japan ‘would avoid dollar-bonds’ - FT Alphaville