Raw Japan

The yen’s surge to a 13-year high against the dollar, record highs against sterling and a multi-year peak against the euro are unlikely to push Japanese authorities into trying to halt the currency’s rise.
Japan hasn’t intervened in the foreign exchange market since March 2004, after a 15-month long, 35 trillion yen ($390 billion) selling spree aimed at preventing the currency’s strength from snuffing out an economic recovery.

And even though the plunge in exports is looking painful, it seems unlikely the Ministry of Finance and the Bank of Japan will step in just yet, although rhetoric about watching currency markets closely will continue and may get louder.

Analysts reckon the trigger for any intervention would be a steeper fall in the stock market and a much sharper and sustained climb in the yen — or a steeper fall in the dollar — to 85.00 yen per dollar or beyond. The yen was at 89.00 on Friday and it has been as strong as 87.10 already this year, as investors worried about the U.S. and European banking sectors have played safe by buying yen.

The reason a weaker share market would be a trigger is that Japanese authorities will be concerned that falling stocks will hit business sentiment further, impair companies’ ability to raise capital, erode national wealth and harm the financial sector.

The other problem is that with interest rates close to zero the central bank has little room to use rates to boost the economy, but a stronger exchange rate hurts exporters already suffering from a slump in demand overseas.

The markets are keeping a watchful eye for any signs Japan will intervene. But analysts have also noted U.S. Treasury Secretary-to-be Timothy Geithner’s comment that major trading partners should operate with a flexible exchange rate system in which market forces determine the value of exchange rates. In the past, that has tended to mean “leave your currency alone”.

Geithner has subsequently said a strong dollar is in the interests of the United States – but the world will wait to see what that means in terms of action.

The Group of Seven economic powers is expected to discuss sterling, which has dipped to a 23-year against the dollar, at a meeting in February — as well as the dollar, euro and yen. But a G7 source has said the idea at the moment is not to make economic conditions worse with competitive devaluations.
Japan’s chances of halting the yen’s rise are slimmer if it acts on its own.

But if it does intervene, pushing the exchange rate down tends to be easier than trying to prop it up. And when it comes to selling yen, Japan is no stranger to going it alone.