As yen keeps rising, the market remembers 1999

An shift in Japan's currency intervention stance has analysts recalling 1999, when it stood aside to let the yen rise to ¥101 to the dollar.

But some see chances of a slide in the dollar as even greater than they were then.

A weekend statement by the Group of Seven industrial nations has done little to discourage this view.

"Currency markets took the G7 statement as targeting Japan and China, but at the same time it cast a spotlight on the US problem," said Mitsuru Saito, chief economist at UFJ Tsubasa Securities.

"If the United States seriously wants to adjust its current account deficit, the dollar would need to be around ¥80," Saito said.

US fundamentals have worsened significantly since 1999, with its current account deficit swelling to record levels and a weak job market still posing a risk to recovery.

On Tuesday, the dollar fell to a three-year low of ¥110.91 compared with the ¥120 level in early August.

Now the market is wondering if Japanese authorities will change their stance on currency intervention after the appointment of a new finance minister, Sadakazu Tanigaki.

Memories is still fresh of when Haruhiko Kuroda took over as the Ministry of Finance's main spokesman on forex policy from Eisuke Sakakibara -- dubbed "Mr Yen" because of his influence over the market -- in July 1999, and caused a stir with a large volume of yen-selling intervention in his first week in the job.

Kuroda was replaced in January by Zembei Mizoguchi.

In the Japanese financial year that began in April 1999, when the Tokyo stock market was rising, foreign investors bought a net ¥11 trillion of Japanese shares (worth about US$98 billion at today's exchange rate), pushing up the yen. The market's key Nikkei average reach a high of over 19,000 in that year.

At that time, Japan was aggressively intervening in the market to curb the yen's rise so as to help Japanese exporters -- the main engine of the nation's economic recovery -- spending what was then a record ¥7.6 trillion. Officials worry that a strong yen hurts exporters and could derail the recovery.

But it suddenly stopped intervening, and the dollar fell to the ¥101 level by the year-end. The reason Japan pulled back is thought to be US criticism of its massive intervention at a time when the rate was around ¥122 to the dollar, and a rise in Tokyo share prices which was attracting funds into Japan and easing concerns about the economy and exports.

Foreign investors are again pouring in funds into Japanese assets, with net buying of around ¥6.4 trillion of stocks by mid-September, and last week the Nikkei hit 15-month highs.

"Japan suddenly changed its game in 1999 and slowed intervention, letting the yen go as high as 101 yen, and the situation is very similar now," said Junya Tanase, a forex strategist at JP Morgan Chase.

Analysts intervention would be unlikely to offset massive fund flows into Japanese assets and a current account surplus of roughly ¥1.0 trillion to ¥1.5 trillion every month.

Japan a record ¥9 trillion in keeping the yen down in the first seven months of this year, although it stayed out of the market last month.

"Japan seems to have changed its stance on currency intervention to one of tolerating a gradual dollar fall while making sure it doesn't fall too sharply," Saito said.

"But this is hard to do, as history has shown."