Finance Minister Yoshihiko Noda sharpened his rhetoric on
foreign exchange on Wednesday as a rise in the yen underlined concerns that the
currency’s strength could threaten the economic recovery.
Political powerbroker Ichiro Ozawa, who is challenging Prime
Minister Naoto Kan in a close-fought ruling party leadership race, later said
Japan should take all possible steps to counter the rising currency including
market intervention, even if solo action is ineffective.
Investors initially ignored Noda’s comments and pushed the
yen to a 15-year high of 83.34 yen per dollar, doubting that Japan would risk
going solo and all but ruling out coordinated intervention with other Group of
Seven countries.
The yen later gave back some of its gains.
A report showing Japanese machinery orders rose by the most
in seven months in July did little to ease concern that a surging yen could
undermine the country’s important export sector, seen as critical to the
recovery from the global economic crisis.
The Bank of Japan has indicated it is willing to ease
monetary policy to help the economy, but is likely to bide its time until the
ruling party settles a leadership contest with a vote on Sept. 14.
As the yen surged, the Nikkei average fell 2.2 percent to
its lowest close in a week on worries about the potential hit to export
earnings.
Japanese officials have been trying to talk down the yen but
so far their comments have had little effect as it keeps rising due to concerns
about a slowdown in the global economy and the health of the European banking
system.
“Basically, it is important to closely communicate with the
international community, and we are currently making efforts on this,” Finance
Minister Noda told lawmakers in parliament.
“In the end, we will take decisive measures including
intervention when needed.” The remarks indicated a shift in Noda’s language.
Previously he has repeatedly declined to comment on intervention when asked
about it by the media.
The government will make necessary preparations for
intervention, which should be conducted in the most effective way possible,
Parliamentary Secretary of Finance Hiroshi Ogushi said.
Meanwhile Ozawa told reporters Japan should intervene and
sell the yen even if solo action was likely to be ineffective. He had said last
week Japan should be prepared to act on currencies.
“They are trying to talk as much as they can, but we think
actual intervention is unlikely because other G7 countries wouldn’t cooperate,”
said Thomas Harr, head of Asian foreign exchange strategy at Standard Chartered
in Singapore.
“The most likely outcome is more easing from the BOJ, which
may be some measures to lower short-term interest rates.” Kan has vowed to take
firm measures against currencies when needed in a plan to boost jobs and the
economy.
Japan has not intervened in the currency market since March
2004, after spending 35 trillion yen ($420 billion) over a 15-month period to
support an economic recovery.
STRONG YEN SEEN HURTING SENTIMENT Japan’s core
private-sector machinery orders, a highly volatile data series seen as a
leading indicator of capital spending, rose 8.8 percent in July, a Cabinet
Office report showed.
That was the biggest gain since a 15.4 percent rise in
December and above the median market forecast for a 1.8 percent increase.
But economists say strong gains in corporate spending are
unlikely to last because of the damage a rising yen can do to corporate
sentiment.
“Given the yen’s rise and a slowdown in overseas economies,
corporate investment will likely remain sluggish even if it picks up from low
levels,” said Junko Nishioka, chief economist for Japan at RBS Securities in
Tokyo.
“As markets focus on the yen’s strength, the government
should take steps to help financing of small firms. The BOJ, meanwhile, should
strengthen its monetary easing stance even if it risks being criticized for
bowing to government pressure.” Ozawa said there was limited room for the BOJ
to tackle the rising yen via policy steps even as he urged aggressive action on
other fronts, including considering further debt issuance if necessary to fund
steps to bolster a faltering economy.
The BOJ stood pat on monetary policy on Tuesday but vowed
timely action when needed, setting the stage for possible easing next month.
By then, the leader of the ruling Democratic Party will be
known and the central bank will have a clearer idea about what damage the yen
is doing to Japan’s exports.
BOJ Governor Masaaki Shirakawa reiterated on Wednesday his
reluctance to return to quantitative easing to support the flagging recovery
but indicated he was weighing the options.