Christopher Anstey, Monami Yui and Kazumi Miura, ©2012 Bloomberg News
Wednesday, June 6, 2012
June 7 (Bloomberg) -- Investors seek the yen as a haven from turmoil sparked by a debt crisis, sending it to a postwar high against the dollar and threatening to deepen Japan's economic stagnation. The year: 1995.
It's deja-vu for Japanese policy makers, who 17 years ago countered the surge in the yen with record intervention in the foreign-exchange market, driving it down by about 30 percent within five months. Like then, the currency is again trading at postwar highs, undermining Japan's recovery from last year's earthquake and tsunami as investors seek refuge from Europe.
The one difference is intervention may not be effective, as U.S. opposition contrasts with the American and European cooperation in yen sales that helped make the 1995 operations a success. Also making the task tougher is a strengthening in Japan's status as the world's largest net creditor, bolstering the yen's allure in times of global financial stress as investors gird for a potential Greek exit from the euro.
"It's very, very difficult for the authorities in Japan to dilute the currency as a safe-haven instrument," said Paul Mackel, head of Asia-Pacific currency research at HSBC Holdings Plc in Hong Kong. "The periodic moves to create shock and awe have only worked very temporarily."
Two rounds of unilateral yen sales last year failed to have a lasting impact, with the currency at 79.45 per dollar as of 3 p.m. in Tokyo, up from this year's low of 84.18 in March. Acting at the Ministry of Finance's behest, the Bank of Japan spent a record 8.07 trillion yen ($103 billion) Oct. 31 to bring the currency down from the record 75.35 yen that day. Japan sold at least 14.3 trillion yen in last year's interventions.
Backing the yen's haven status is Japan's increase in net foreign assets, which amounted to 54 percent of gross domestic product in December, up from 13 percent at the end of 1994, according to data compiled by Bloomberg from Finance Ministry figures released May 22. Current-account surpluses mean Japan doesn't need to rely on overseas investors to fund a public debt load that's more than twice the size of the economy.
"The yen will remain strong," Tomoya Masanao, head of portfolio management for Japan at Pacific Investment Management Co., which runs the world's biggest bond fund, said at a Tokyo conference June 1.
"Any large-scale intervention by MOF would need to be paired with?large-scale monetary easing by the BOJ for the move to be a game?changer," which is unlikely, he said.
Governor Masaaki Shirakawa has given little indication of willingness to add to the central bank's 20 trillion yen bump in its asset-purchase program this year. Minutes of the BOJ board's April 27 meeting released last week showed that "members made note of some misunderstanding that the bank would continue to increase the size of its program in an automatic manner."
The central bank chief says excess monetary loosening raises the risk of asset-price bubbles, and told lawmakers at the Diet on May 31 that the foreign-exchange market has been affected by swings in investor appetite for risk. He said at a forum in Tokyo June 4 that the bank is monitoring the impact of yen gains on the economy. The BOJ next gathers June 14-15.
Finance Minister Jun Azumi explained to his Group of Seven counterparts on a June 5 conference call the yen's jump is causing "serious damage" to Japan's economy. He told reporters in Tokyo after the call that he wanted members to observe past G-7 statements against "disorderly movements" in currencies. He said "there was no particular response" to his comments.