Business News and Articles
StockNewsLine.com

Kan Rewinds Stance on Yen Policy to Avoid 'Fatal Blow' to Japan

By Aki Ito and Toru Fujioka

(Bloomberg) — Japanese Finance Minister Naoto Kan's remarks his first day in office signal he wants a clear break from the stance first adopted by his predecessor, stiffening the government's resolve against a rising yen.

Kan said in his inaugural press conference in Tokyo today that he would like the currency to weaken "a bit more" after its 9 percent drop from a 14-year high in November. By contrast, the retired Hirohisa Fujii came to office in September dismissing the value of a weaker yen to Japan's economy.

"With Kan the Ministry of Finance will turn back the clock," said Stephen Jen, managing director of macroeconomics and currencies at BlueGold Capital Management LLP in London and the former head of foreign exchange research at Morgan Stanley.

The shift underscores officials' concern that Japan's recovery from its deepest postwar recession may stall given limited domestic demand and persistent declines in consumer prices. Kan's comments also indicate he's less opposed to intervene and sell yen on any surge against the dollar — a step not taken since 2004.

"In a normal economy, saying nothing is the best policy" on currencies, said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co. in Tokyo. "But a stronger yen right now would deliver a fatal blow," he said, adding that Kan's stance may help avoid any "overshooting" of the currency.

Japan's currency tumbled after Kan's remarks, and it was down 0.8 percent at 93.08 at noon in London. While the yen has retreated about 9 percent from the November high of 84.83, it remains 18 percent higher than two years ago.

Yen Purchases

Earlier this decade, the Finance Ministry, through the Bank of Japan, repeatedly intervened to stem gains in the yen. Authorities sold a record 20.4 trillion yen ($220 billion) in 2003 and 14.8 trillion yen in the first three months of 2004, the last time the country acted in the currency market. Japan hasn't bought yen since 1998.

Fujii roiled traders when he took office in September by indicating he favored a stronger yen, as part of the Democratic Party of Japan-led government's campaign to bolster households' spending power. He said that month it was "absurd" that a lower exchange rate helps exporters, and that market interventions can "destroy a free economy." After the yen soared, he warned in November that Japan was ready to stem "abnormal" moves.

Intervention Threat

Kan's remarks "will reinstall market fears over the threat of intervention which dissipated somewhat while Fujii was at the helm," Goldman Sachs Group Inc. economist Fiona Lake in Hong Kong wrote in a note to clients today. At the same time, Goldman analysts said the yen is more likely to weaken from increased monetary easing by the Bank of Japan than political considerations.

Kan, who is also deputy prime minister, said today he will seek to cooperate with the Bank of Japan on the yen's level. He last year urged the central bank to fight deflation, before it announced a 10 trillion yen ($112 billion) credit program.

"We will make efforts to make the yen an appropriate level while considering various impacts on the economy that may be caused by currencies," Kan said in the press conference today. While the yen has had a large correction since reaching a 14-year high in November "I hope it will correct a bit more," he said.

Export Reliance

Exporters have led Japan's recovery from its worst postwar recession, contributing most of the 1.3 percent annualized expansion in the third quarter of 2009. A rebound in demand from abroad, especially Asia, has prompted manufacturers to increase production for nine months. Komatsu Ltd. and Hitachi Construction Machinery Co., Asia's two largest excavator makers, said this week that December sales in China more than doubled.

By contrast, spending at home has yet to pick up as about one-third of factory capacity remains idle and consumers retrench because of declining wages, exacerbating deflation.

Regions : Asia

More articles on this topic: