The Japanese officialdom signaled an interest in a cheaper yen when the Nikkei breached 25 year lows. But the concern was not the level of the yen per se, but trying to use a weaker yen (it had run up to over 92 to the dollar) as to a desperate effort to shore up the Nikkei. Japanese banks still have significant shareholdings in other companies and are permitted to count a percentage of the market value (I believe 50%) towards their statutory capital. A further fall in stock prices would have put some banks below statutory minimums, forcing them to sell stock into a distressed market. Since the yen and the Nikkei generally go in reverse directions, talking down the yen was an effort to talk up the stock market.
Despite this recent reaction, the Japanese are actually more receptive to a stronger yen than one might think. A senior Japanese executive friend of mine was meeting with top financial regulators and central bank employees the very day an earlier burst of carry trade covering took the yen higher than 96. They were remarkably sanguine, said the dollar had fundamental problems, and expected the yen eventually to go even higher.
A semi-official confirmation comes today from Eisuke Sakakibara, widely known as “Mr. Yen”. From Bloomberg:
Japan will benefit from a strong yen because it will hold down prices for raw materials, said Eisuke Sakakibara, formerly Japan’s top currency official.
“I still believe a strong yen is in the national interest of Japan, particularly in this situation when raw material prices will increase,” Sakakibara said in an interview with Bloomberg Television in Singapore yesterday. The yen may rise to as high as 80 per dollar as so-called carry trades unwind, said Sakakibara, who was dubbed “Mr. Yen” during his 1997-1999 tenure at the Finance Ministry because of his influence over currency markets.
The yen’s 15 percent gain against the dollar this year and 33 percent advance versus the euro prompted Japan’s government to announce last month it may buy or sell currencies to influence exchange rates, as the world’s second-largest economy stumbled. Gross domestic product shrank by an annualized 3 percent in the second quarter as exports dropped 2.5 percent, according to government data.
The yen traded at 97.30 per dollar at 8:55 a.m. in Tokyo from 97.75 late yesterday. It was quoted at 123.56 per euro from 124.29. Against the Australian dollar, the yen is 64.68 from 66.35. It was at 56.88 versus the New Zealand dollar from 58.53.
Japanese exporters are competitive even if the yen rises to between 80 and 85 per U.S. dollar, Sakakibara said.
“You have to differentiate between balance sheet and competitiveness,” he said. “On the balance sheet, a high yen will cut into their profits but as far as competitiveness is concerned, they are competing quite well with Ford or General Motors.”…
The Bank of Japan’s decision last week to cut the benchmark policy rate by 20 basis points, or 0.2 percentage point, was surprising, Sakakibara said.
“Probably they didn’t want to cut and the market was expecting 25 basis points,” he said. “So cutting by 20 basis points was probably due to resistance to market pressure and political pressure.”
The rate cut wasn’t aimed at weakening the yen, he said, calling the reduction a “symbolic move.”
Sakakibara also doubts the Bank of Japan or the U.S. Federal Reserve will reduce benchmark policy rates to zero.
“No chance,” he said. “Cutting interest rates by another 30 basis points doesn’t matter. Zero interest rate policy is something no central bank wants to do as that implies that the short-term money market doesn’t function.”
The Fed may cut its benchmark policy rate by a further 25 or 50 basis points at the most, he said.