The US dollar tumbled to a fresh 13-year low against the yen yesterday after the US Federal Reserve slashed interest rates, raising pressure on Japan’s central bank to do likewise.
Japan’s government also hinted it was considering intervention to bring down the yen, a step that the world’s second largest economy has not taken for nearly five years.
The Fed lowered its target rate from 1.0 percent to a range of zero to 0.25 percent in an attempt to combat the deepening recession, underscored by fresh bad data including a historic plunge in housing starts.
The dollar fell to ¥88.22 in Tokyo afternoon trade before rebounding to ¥88.42, still down from ¥88.98 in New York late Tuesday.
The euro jumped to US$1.4113 from US$1.4018, edging closer to a two-and-a-half-month high. It was changing hands at ¥124.70 from ¥124.74.
The US central bank lowered borrowing costs for the 10th time since September last year, putting it below the 0.30 percent in Japan, which for years has had the world’s lowest interest rates.
The Federal Open Market Committee in a statement said it expected to keep the federal funds rate “exceptionally low” for some time because of markedly declining inflationary pressures.
With Japan in recession, the government made little secret that it would like the country’s own central bank to cut rates at its two-day meeting opening today. A stronger yen makes Japanese exports less competitive overseas.
An abnormal rise in the yen “will have an impact on export-related industries,” Chief Cabinet Secretary Takeo Kawamura told a news conference.
“I hope [the Bank of Japan, BoJ] will take monetary measures reflecting on this point,” he added.
Finance Minister Shoichi Nakagawa said separately: “I want the BoJ to share its views on the economy with the government and to do what is necessary to support it. But individual decisions are up to the BoJ,” he said.
The Bank of Japan is independent, but has often come under government pressure.
Other central banks could follow, analysts said.
“I think it’s more and more likely that key rates in Asia are going to converge at a level much lower than previously forecast,” said Glenn Maguire, Asia chief economist with Societe Generale in Hong Kong.
“We will see an ultra-low interest rate policy across Asia and central banks on a case by case basis will target liquidity in the banking system where needed.”
Hong Kong’s central bank lowered its key interest rate to an all-time low yesterday in response to the Federal Reserve’s historic rate cut.
The Hong Kong Monetary Authority slashed the base rate from 1.5 percent to 0.5 percent, it said in a statement. Because the territory’s currency is pegged to the dollar, the monetary authority’s actions usually track the Fed’s.
“We’ve provided a very loose monetary policy,” Joseph Yam (任志剛), the authority’s chief executive, told reporters. “We hope banks can make use of this loose policy to support the Hong Kong economy, even though they are now facing a difficult business environment.”
Nakagawa also said Japan would take “every possible measure” to shore up markets, fuelling speculation that Tokyo could intervene in currency markets to put a ceiling to the yen’s surge.
He had earlier ruled out immediate intervention, noting that Tokyo share prices were still rising due to hopes for the US economy. The benchmark Nikkei index ended up 0.52 percent after a rocky day.