January 16, 2012 11:39 am

Japan signals it may intervene in euro market

Jun Azumi, Japan’s finance minister, has raised the prospect of the government’s first intervention in the euro currency market for nine years after warning that the yen’s gains against the euro were “a bit rapid”.

Europe’s struggle to resolve its debt crisis led to a 15 per cent appreciation of the yen against the euro in the second half of last year. This year, as tensions have persisted, the yen has gained another 2.4 per cent.

That is hurting the Japanese economy, said Daisaku Ueno, foreign currency strategist at UBS in Tokyo. “In dollar/yen, companies are adjusting to yen strength. But as Japan exports more to the eurozone than it imports from it, it is more difficult to adjust to euro weakness.”

Japanese companies had a euro-denominated trade surplus worth Y1tn ($13bn) in the first half of last year, according to Ministry of Finance data. In dollar-denominated trade, which is dominated by raw materials imports, there was a deficit worth Y8.6tn.

Since May 2003 the government has bought only US dollars in its interventions. Last year the Bank
of Japan, acting on orders from the Ministry of Finance, sold about Y14tn on three separate occasions. Since the last intervention at the end of October, however, the dollar/yen rate has been relatively stable and much of the trade-weighted appreciation of the yen has been due to the weakness of the euro.

Two weeks ago, Mr Azumi called for stronger efforts by Europe to stem the region’s debt crisis, saying drops in the euro against the yen could have “a very big impact” on Japan’s exports bound for the European Union, which totalled Y7tn in the first 11 months last year.

These remarks, coupled with those he made on Monday, point to a “very early phase of verbal intervention”, said Masafumi Yamamoto, chief FX strategist at Barclays Capital in Tokyo. “If the euro keeps falling, the 95 level [in euro/yen] could act as a similar threshold to 75 in dollar/yen, which is seen as a potential trigger for intervention.”

On Monday the yen touched an 11-year low of Y97.01 to the euro, well below the typical assumptions of Y105 or Y110 for major exporters. At 7pm in Tokyo the dollar was trading at Y76.82 to the yen, close to its average over the past six months.

If the Ministry of Finance does decide to support the euro against the yen, it may simultaneously buy dollars. Some 16 out of 18 euro-buying interventions between 1999 and 2003 were done on the same day as the BoJ bought US dollars, analysts at Nomura note.

Japan’s resolve to weaken the yen seems strong. Last month the cabinet approved the lifting of the ceiling for financing-bill issuance from Y165tn to Y195tn, giving the government firepower for another Y70tn in intervention, analysts at BarCap estimate.

Meanwhile, overseas investors are continuing to buy Japan’s bonds as a haven, increasing the appreciation pressure on the yen.

According to the nominal effective exchange rate published by the BoJ, the currency was 2 per cent stronger last Friday than it was on October 31, the day of the most recent dollar/yen intervention.

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