A Bank of Japan (BOJ) board member warned that the yen might strengthen further, two days after the government intervened to protect exporters by weakening the currency from a postwar record against the US dollar.
“We could see the yen, regarded as a relatively safe currency, rise even further” should investors’ risk aversion intensify over a deepening European crisis, the official, Sayuri Shirai, said in a speech yesterday in Kofu, central Japan.
Authorities sold the yen on Monday after the currency surged to its highest level since World War II in what Barclays Bank PLC and Totan Research Co estimate was a record intervention in foreign-exchange markets. Japan’s government faces almost ¥40 trillion (US$512 billion) in losses from its past yen sales because of the currency’s appreciation, according to estimates by JPMorgan Chase & Co.
“Shirai’s comments suggest that she is aware the BOJ will likely have to do more if the impact of the European crisis on Japan becomes clearer,” said Mari Iwashita, chief market economist at SMBC Nikko Securities Inc in Tokyo. “The European economy is Shirai’s area of expertise and she knows we can’t be optimistic about the outlook.”
The central bank last week bolstered monetary stimulus by expanding its planned purchases of government bonds by ¥5 trillion. Shirai, a former IMF economist who has published works on European fiscal policy, said Japan’s exports could be hurt by developments in Europe because the crisis might also dampen demand from Japan’s other trading partners.
Shirai said the central bank would also need to be careful and make sure that further asset purchases would not create imbalances in financial markets.
“We should minimize the chance of distorting markets and I’m very cautious about that’’ when the bank buys assets, Shirai said at a press conference in Kofu after her speech. ’’In principle, the market is healthy when it is determined by the balance of supply and demand. We will take into account that when we consider measures.’’
“It’s better to assume we’ll continue to see heightened tension in global financial markets for some time,” Shirai said.
The bank will forgo draining yen funds that have entered the market after intervention, a person familiar with the matter said. Leaving the yen funds in the market would suggest that the bank wants to bolster the effects of its monetary stimulus by keeping the extra cash available to the market.
Valuation losses on Japan’s foreign-exchange reserves minus yen liabilities totaled ¥35.3 trillion at the end of last year, according to Japanese finance ministry data. The losses might swell further as the yen is projected to climb to 72 versus the dollar by September next year, said Tohru Sasaki, head of Japan rates and foreign-exchange research at JPMorgan Chase in Tokyo.
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