Japan intervenes to weaken yen

(FT) -- Tokyo intervened in the currency markets for the first time in more than six years to weaken the yen, after the currency broke through Y83 against the U.S. dollar and threatened exporter profits and business sentiment.

The unilateral intervention on Wednesday morning sent the yen down as much as Y1 within an hour and gave the Nikkei 225 and its exporter constituents a boost. However, the action came at a sensitive time that could cloud the debate over China's control over the renminbi.

Yoshihiko Noda, the finance minister, told reporters that the yen's sharp gains from Tuesday -- following Prime Minister Naoto Kan's victory in his Democratic party's leadership battle -- were "a problem that could not be overlooked," given that the Japanese economy has suffered some difficulties, including its ongoing struggles with deflation.

"In order to restrain excessive moves in the currency market, we earlier carried out currency intervention," Mr Noda said. He added that he was prepared to take further action, including further intervention, if necessary and that overseas authorities had been contacted.

Yen intervention remains a political matter over and above an economic one, and the decision for the government to intervene gives Mr. Kan the opportunity to show leadership, according to traders and analysts. A trader said that the lull after Tuesday's DPJ vote gave the authorities a chance to catch the market by surprise.

The action is being interpreted as what is known as a smoothing operation, which is carried out to flatten sudden moves in the currency, rather than to send the currency to a specific point, according to traders. Yoshito Sengoku, chief cabinet secretary, suggested to reporters that the finance ministry saw levels of Y82 as a line of defense for the economy.

Before the intervention, the dollar had continued its decline against the yen to as low as Y82.88 in morning trading in Tokyo, extending losses overnight, in spite of upbeat consumer spending data from the U.S. Traders had also been testing the resolve of Mr. Kan to stay out of the market after he won a leadership challenge from party heavyweight Ichiro Ozawa on Tuesday.

The intervention began around 10.30 a.m. Tokyo time, after which the yen dropped as low as Y85.14 and was last trading at Y84.84.

Mr. Ozawa had been seen by markets as more likely than Mr. Kan to intervene to curb the rise of the yen, which had been trading at a 15-year high against the dollar and prompted complaints from the business sector.

The stock market jumped 2.8 per cent to 9,557.85 as of mid-afternoon trading in Tokyo, reversing an earlier 1.1 per cent decline.

Japan's intervention is likely to heighten tension around the already charged issue of China's persistent intervention to hold down the renminbi, which was set to be one of the most contentious issues at the forthcoming meeting of the G20 group of countries in Seoul.

The US is disappointed that China has allowed the currency to rise by less than 1 per cent against the dollar after its decision to unpeg the renminbi in June. This week, Congress will hold a series of hearings to investigate the options for blocking Chinese imports or having the currency intervention declared illegal by the World Trade Organization.

Japan's intervention is likely to complicate the debate. Several G20 countries, including the U.S., feel that they are under competitive threat from China's currency policy. But the fact that Japan is intervening against its currency -- at a time when the yen is not particularly strong in real terms -- will make it hard to point at China as the one major economy that is manipulating its exchange rate.

Tetsufumi Yamakawa, head of research at Barclays Capital in Tokyo, said Japan's intervention "at least, would give a good excuse to China for not moving by claiming that the Japanese authorities are manipulating the currency [as well]."

He said that this consideration probably had put Tokyo off intervening for such a significant amount of time.

Speaking before Tokyo's intervention, Fred Bergsten, director of the Peterson Institute think-tank in Washington and an advocate of litigious and legislative confrontation with Beijing, said that the US needed to organize a coalition of countries, including Japan, to put pressure on China at the G20.

Debate as to if and when Tokyo would intervene had also been intensifying, given that previous unilateral interventions in the market had only proved successful over the short-term, such as days or weeks.

Moreover, the last time that the finance ministry ordered the central bank to intervene over a 15-month period of 2003-04 left it with unrealized losses of Y32,300bn in its foreign exchange special account.

There is also an argument over whether the yen is really strong or not. Nominally speaking, it has been trading at 15-year highs. However, adjusted for prices and trade weighted to include a basket of currencies used by countries that Japan trades the most with, shows a very different picture.