Japan sold yen in the market on Wednesday for the first time in six years and promised more to come in a bid to stop the currency's relentless rise from hurting exporters and threatening a fragile economic recovery.
Fresh after victory in a party leadership contest, Japan's Prime Minister Naoto Kan appeared to be stepping up efforts to wrench the country out of deflation by targeting yen strength, which has weighed on stock prices and corporate profits.
Even as the U.S. dollar surged as much as 3 percent on the day against the yen, doubts lingered about the ultimate effectiveness of Japan's unilateral yen selling spree. A 15-month solo effort by Switzerland to weaken its currency did little to tame the Swiss franc.
In addition, Japan is trying to put a halt to yen strength while other major central banks such as the Federal Reserve may be considering additional steps to ease policy that could weigh on their respective currencies.
"It is far less clear that intervention will be effective in a world of zero interest rates and excess liquidity, but we think that it still makes sense for Japan to take action to try to arrest yen strength," Richard Jerram, chief Asia economist at Macquarie Securities in Tokyo, said.
The dollar was trading at 85.11 yen, up 2.5 percent on the day after earlier climbing to around 85.50 yen. A government official said the finance ministry wanted to defend 82 yen.
Japan's Ministry of Finance said intervention was not finished. Japanese news agency Kyodo cited a ministry official saying Japan had intervened in European markets and will intervene in New York trading hours if need be.
Estimates varied on how much Japan has spent in its first intervention in the foreign exchange market since 2003-2004, when its forked out 35 trillion yen ($409 billion).
Dealers suggested Wednesday's intervention amounted to about 300-500 billion yen ($3.6-$6 billion), though Japanese media cited market sources saying the amount was some 1 trillion yen.
Unlike in previous intervention, the Bank of Japan will not drain the money flowing into the economy as a result of the yen selling, sources familiar with the matter said.
That indicated the central bank plans to use the sold yen as a monetary tool to boost liquidity and support the economy.
Authorities that sell their own currencies to weaken them often issue bills to "sterilize" the funds and keep the excess money from becoming inflationary. In Japan's case, it wants to promote inflation since the economy has been dogged with deflation for much of the past decade.
"The government's aim, and the aim of authorities in general, is to add monetary injections to the economy," Callum Henderson, global head of foreign exchange strategy with Standard Chartered in Singapore, told Reuters Insider.
"Unsterilized intervention should be yen-negative, it should be very bullish for higher risk assets, very bullish for stocks in Japan and obviously it should add to the impact of the intervention of the yen," he said.
The central bank may follow up with additional steps, such as buying more government debt, economists said.
Analysts doubt other countries would help Japan tamp down the yen because they need weaker currencies to boost exports and growth. Intense pressure from Washington on China to let its currency strengthen also make attempts by major economies to weaken their currencies particularly sensitive.
Finance Minister Yoshihiko Noda, who will reportedly keep his post after a cabinet reshuffle, indicated Tokyo acted alone on the yen. He said he was in contact with authorities overseas and analysts expected Japan to be spared international criticism.
"Japan will be seen as a special case," said Simon Flint, global head of foreign exchange research with Nomura in Singapore. "Obviously, its economy has been in significant trouble for a while, stocks have been depressed for some time, export performance relative to the Asian peer group has been very weak," he said.
"To some degree there will be some sympathy in the rest of the world for Japan's predicament."
U.S. officials at the Federal Reserve and the Treasury declined immediate comment but the European Commission indicated some sympathy with Japan's situation, saying a too rapid rise in the yen could pose economic challenges.
Analysts doubted whether Kan's government was ready for a protracted battle with markets similar to the 15-month yen selling spree earlier this decade since that campaign proved ineffective at halting the yen's strength for long.
"The amount of intervention isn't likely to be as much as Japan was spending the last time it intervened, so it won't be enough to stop dollar/yen from falling. It is also unlikely that other countries will co-operate," said Junya Tanase, currency strategist at JP Morgan in Tokyo.
Japan need only look to Switzerland. The Swiss franc shot to a record high against the euro two weeks after the country's central bank ended a 15-month policy in June 2010 of weakening its currency.
Noda declined to say if authorities had bought dollars. But two traders said the Bank of Japan, which acts on the ministry's behalf, appeared to have bought dollars around 83 yen at the start of the intervention.
"We will take decisive steps if necessary, including intervention, while continuing to closely watch currency market moves from now on," Noda told reporters.
Wednesday's action pleased Japanese exporters, many of whom had expected the yen to average 90 per dollar this fiscal year.
"We applaud the move by the government and the Bank of Japan to correct the yen's strength," Japan's No. 2 automaker Honda Motor Co. said in a statement.
Honda has penciled in 87 yen per dollar in its estimates for the fiscal year to March 2011.
WILL THE YEN STOP RISING?
Kan's government has been trying to talk down the yen as it strengthened beyond 90 per dollar. Until Wednesday, it had stopped short of intervening, apparently worried that acting without Group of Seven partners would not achieve much.
Kan was re-elected as ruling party leader on Tuesday, decisively fending off a challenge from powerbroker Ichiro Ozawa, an outspoken advocate of intervention.
"There were views in the market that Kan was more tolerant of a higher yen and the yen rose after he won the ruling party leadership vote yesterday," said Yasuo Yamamoto, senior economist at Mizuho Research Institute.
"The government probably wanted to stamp out those views. But the question is: Will the yen stop rising from here? It's not clear."
The yen had surged to its highest against the dollar since 1995, as low U.S. interest rates have made the dollar cheap to borrow and swap for higher-yielding assets and as talk has resurfaced that the Fed might loosen policy further.
The Japanese currency's rise has brought it closer to its record peak of 79.75 per dollar set in 1995 and has weighed on the Tokyo stock market's Nikkei average, which climbed 2.3 percent on news of the intervention.
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