The Bank of Japan (BOJ) stepped closer to currency intervention yesterday than at any time in the last five years by checking exchange rates with commercial banks as the yen rallied to a 14-year high against the dollar.
Still, market sources said intervention was highly unlikely in the short term and that authorities were instead aiming to temper the sentiment driving the yen higher.
While the central bank made its presence known in the market, Japanese Finance Minister Hirohisa Fujii raised the prospect of a G7 joint statement on currencies to cool the yen’s rally.
PHOTO: REUTERS
The dollar slumped to a low of ¥84.82 as investors shunned riskier assets after news about Dubai’s debt problems, but it pared its losses after Fujii’s comments because his rhetoric was sharper than it had been on Thursday.
G7 countries issued a statement in October last year when the yen rallied against other major currencies, so traders and analysts said a joint statement was possible.
But joint intervention was extremely unlikely, they said. Such action might send the wrong signal at a time when the G7 wants to encourage China to let the yuan rise by maintaining flexible currency markets.
Unilateral intervention by Japan was also unlikely because the yen’s rise is largely the result of the dollar’s broad weakness, and the BOJ would not have enough financial firepower to reverse the dollar’s decline.
The mere threat of joint action though was enough to curb the yen’s gains against the dollar, traders said.
“I would respond flexibly to a joint statement on currencies,” Fujii told reporters after a Cabinet meeting.
Fujii said he was also flexible about contacting currency authorities in the US and Europe, adding that he was very nervous about currency moves and it was possible Japan could respond.
He declined to comment on intervention, saying he was not in a position to use the word due to commitments with other G7 countries on currency flexibility.
Market sources said the government and the Bank of Japan had checked dollar-yen rates with commercial banks, going beyond their usual practice of market contact than at any time since authorities intervened earlier this decade to curb yen strength from harming exports.
That intervention came to a stop in March 2004 after authorities dumped ¥35 trillion over 15 months.
During that period, the finance ministry and the BOJ often checked rates as a prelude to intervention.
“The Bank of Japan may have wanted to make its presence felt,” a trader said of yesterday’s rate checking.
The dollar has been in a long-term decline. Against a basket of major currencies it hit a 15-month low on Thursday.
“I would not be surprised if the G7 or the Group of 20 issues a statement to prevent the dollar from weakening further, although it is unclear if they will act now or wait until a G7 meeting in February,” said Koji Fukaya, a senior currency strategist at Deutsche Securities in Tokyo. “But the statement would unlikely be the kind issued in October last year, because the current situation stems from a weak dollar.”
The yen has risen 5.3 percent since the end of last year. In trade-weighted terms, its rise is also modest with the currency well below highs hit in January.
“I have not heard of intervention at this point but in the future there will be various options and if necessary I’ll talk to ministers involved,” Japanese National Strategy Minister Naoto Kan told reporters.
The dollar’s decline against major currencies has been more pronounced, and traders say its slump against the yen is more a symptom of worries that low US interest rates are fostering economic bubbles and that chances of a Dubai debt default are reigniting financial turmoil.
“I can’t see what purpose dollar/yen intervention would serve,” said Hideki Amikura, executive director of foreign exchange services at Nomura Trust & Banking Co in Tokyo.
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