Yen reaches 13-year high against the dollar

The yen appreciated to its strongest level against the dollar in 13 years as the US Federal Reserve unexpectedly cut interest rates from 1 per cent to a range of 0 to 0.25 per cent.

The yen’s strength – it reached Y88.24 to the dollar by mid-afternoon in Tokyo – puts pressure on the Bank of Japan to cut interest rates from their current level of 0.3 per cent to 0.1 per cent at its meeting that starts on Thursday.

The yen did weaken a little to Y88.44 by early evening in Japan but was still at levels last seen in August 1995 in the weeks preceding Plaza Accord agreement.

Japan’s chief cabinet secretary Takeo Kawamura said the Bank of Japan, which is legally independent from the government, should take “appropriate” action after the yen’s recent surge.

The currency has gained more than quarter in value against the dollar so far this year. It gained a reputation as a safe-haven currency during turbulent times, and investors repatriated money they had borrowed cheaply in Japan to deposit in countries like Australia where interest rates have been high.

The yen’s strength makes life difficult for exporters as they either have to raise prices in the US at a time when demand is falling, or face smaller profit margins.

“The abnormal rise in the yen could affect export industries and I hope that the BOJ will make a comprehensive consideration, including those factors to decide its monetary policy,” Mr Kawamura told reporters.

The BoJ’s tankan survey, which measures corporate confidence, showed its biggest drop this week for 34 years as exports weakened in the light of the deepening global slowdown.

Shoichi Nakagawa, Japanese finance minister, said on Wednesday he was not considering intervention in currency markets for now, the Nikkei newspaper reported on its website. Nakagawa also said the latest moves in currencies were not too sharp and that the yen’s recent gains were not bad.

Patrick Bennett, Asian currency strategist at Société Générale in Hong Kong, said the yen’s rally might be nearing its end. “We are running into a point where it’s difficult to validate the yen’s strength on its fundamentals,” he said. “Are we facing a permanently strong yen? I don’t think so.”

Japan, he said, had long had a current account surplus but this had been recycled by buying foreign investments. “In a risk-averse world people are happier to hold currencies of current account surplus countries rather than those with current account deficits.”

“There’s a perception or belief in the market that if the rest of the world implodes then maybe these [Japanese-owned] foreign assets will be liquidated the money returned to Japan.”

However, he said, in the past six months the pattern of investment flows had not borne this out.