英文讀書會

Uphill Fight To Curb Yen's Rise

The yen keeps getting stronger, and there might not be much Japan can do about it.

The dollar touched an eight-month low against the yen on Wednesday, at 85.32 yen per dollar. It was the U.S. currency's lowest level since Nov. 27, when it hit 84.82 yen. A breach below that mark would take the dollar to its weakest point against the yen in 15 years and bring into view the post-World War II low of 79.75 yen, reached in April 1995. Wednesday afternoon in New York, the dollar was at 86.24 yen.

Finance Minister Yoshihiko Noda stepped up his rhetoric on the issue Wednesday, saying the yen's 'current movement is a little one-sided.' And he promised to 'monitor' yen exchange rates 'more closely.' He declined to say whether he would direct any specific actions, and his words did little to weaken the currency. Any government intervention to weaken the yen would involve fighting very large forces: a broadly weak dollar, a lack of international coordination and China's growing role in the yen market.

Fueling the yen's rise has been a confluence of factors. Reports that the U.S. Federal Reserve might increase its quantitative-easing program to fight off a slowdown in the U.S. economy has sunk U.S. interest rates to near record lows. That has pushed the difference between U.S. and Japanese rates to the smallest level in years, giving little incentive for investors to prefer dollars over yen.

Meanwhile, China has been rapidly accumulating yen this year. The world's largest foreign-currency player -- China has $2.5 trillion worth of reserves -- had accumulated 1.27 trillion yen this year through May, according to the Japanese government, dwarfing its purchases in previous years. If the currency superpower were to shift only 1% of its assets into yen, the buying would be equivalent to Japan's monthly current-account surplus, itself a major factor behind the yen's long-term strength.

China's purchases of yen have prompted private investors to follow suit, driving up demand for Japanese bonds.

Simon Flint, global head of foreign-exchange strategy at Nomura in Singapore, says it has been easy for China and other investors to pile into yen because global investors have shied away from the currency for years, meaning they have little in their portfolios. 'The world and his dog and China are all underweight Japan, anyway,' he says.

The strong yen could challenge Japan's tepid economic recovery because a pricey currency makes the country's exports -- a key driver of its growth -- more expensive on the global market. The dollar is now close to the key threshold of 85 yen, a point below which some analysts and some government officials believe the government will be forced to act in a way aimed at weakening the yen. 'People in the market are now looking more closely at the possibility that the Bank of Japan could take further easing measures,' said Yuichiro Harada, a senior vice president in Mizuho Corporate Bank's foreign-exchange division.

Such steps could in part be aimed at driving down longer-term Japanese interest rates; lowering interest rates tends to put downward pressure on a currency. It isn't clear, however, that the Japanese currency would weaken much, because U.S. interest rates are expected to remain low, too. A similar tactic was tried in December and had only a limited effect on the yen's strength.

Long-term rates have already dropped in Japan. On Wednesday, the yield on Japan's benchmark 10-year government bond fell below 1% for the first time in seven years, ending down 0.04 percentage point at 0.995%.

Another tactic would be to directly intervene in currency markets by selling yen and buying dollars. That is something Japan hasn't done since 2004.

Market intervention could be difficult this time around because the world's developed economies have been committed to allowing market forces to direct currency levels, and it usually takes international coordination to make currency intervention successful over the longer term.

Japan could find it difficult to intervene from a diplomatic standpoint. Tokyo has supported the U.S. efforts to get China to liberalize its heavy-handed currency policy. Turning around and intervening in markets to weaken the yen would go against the argument that markets should be allowed to set currency levels. The U.S. economy, meanwhile, benefits from the recently weaker dollar, which makes the country's exports cheaper and helps in President Barack Obama's goal of doubling exports by 2015. For this reason, 'the Japanese government thinks they can't conduct intervention without the approval of the U.S.,' says Chotaro Morita, head of Japan fixed-income strategy research at Barclays Capital.

'Even if the Japanese government tries to do something, the effect would be quite limited,' says Shigeharu Suzuki, chief executive of Daiwa Securities. He calls the strong yen 'a headache' and a 'tough, negative factor' for Daiwa because it tends to damp demand for overseas investment products the firm sells to Japanese investors. He thinks the dollar in the range of 90 yen to 100 yen would be 'reasonable.'

An intervention would involve fighting very strong currency trends. One is broad dollar weakness. The ICE Dollar Index, which tracks the dollar against a trade-weighted basket of currencies, is down about 5% over the past month.

The yen has stayed strong against the dollar even as investors globally have moved back into riskier assets over the past month. That runs contrary to the recent pattern in which the yen had tended to decline as investors put money into riskier assets such as stocks.

The Global Dow Index, which measures companies around the world, is up about 12% over the past month. Meanwhile, the yen has strengthened, with the dollar dropping about 3% in that period against its Japanese counterpart.

A rebound in exports has increased Japan's current-account surplus, pushing it up 27.9% in the year ended March 31 from the previous year. That puts pressure on the yen to rise.