Japanese Finance Minister Hirohisa Fujii yesterday raised the prospect of currency market intervention for the first time in a scramble to limit the damage from a yen rally fueled by earlier comments that he favored a strong currency.
The yen hit an eight-month high of ¥88.22 to the dollar on Monday after Fujii, who has been on the job for two weeks, repeatedly said that he wanted to avoid intervention and that a strong yen would eventually support domestic demand.
It has since pulled back to around ¥90, giving up all of the previous day’s gains, as Fujii backpedaled on his remarks.
Domestic demand is collapsing in the world’s second-largest economy, pushing the country into its deepest deflation on record last month.
A strong yen puts downward pressure on import prices in a country where deflation is already at record levels, although policymakers and businesses tend to worry more about the impact it has on exports, the key driver of the country’s growth.
The country’s key consumer price index, which excludes volatile fresh food prices, fell 2.4 percent from a year earlier amid rising unemployment and falling wages, the government said yesterday. The figure marks the steepest decline since officials began compiling comparable data in 1971.
Core CPI has now dropped for six straight months and suggests that Japan could face another bout of prolonged deflation.
Fujii reiterated yesterday that global competition to devalue currencies was wrong, but that this didn’t mean Tokyo would leave excessive yen rises unattended.
“If moves are irregular, there is a possibility we might take whatever action deemed necessary for the sake of the country,” Fujii told a news conference after a Cabinet meeting.
He said that his message had been consistent, but that it was being misinterpreted by markets.
“I never said a word about leaving a strong yen as it is. I’m saying it’s wrong, as history shows, for countries to continuously take policies aimed at lowering the value of their currencies,” Fujii said.
This month, the yen has neared January’s 13-year high of ¥87.10 per dollar as the US currency has fallen to its lowest in a year against the likes of the euro and Australian dollar.
While the dollar has been pressured in part by ultra-low interest rates and lost about 3 percent on the yen this month, the Japanese currency has only gained about 1 percent on the euro and none at all against the Australian dollar as investors have resumed buying of higher-yielding assets, including currencies.
Analysts, however, were unconvinced, saying market forces had led Fujii to beat a retreat from his previous comments.
“Fujii appears to have been jolted by the yen’s rapid appreciation and is worried that the strong yen would throw cold water on the economic recovery led by exports,” said Takumi Tsunoda, an economist at Shinkin Central Bank Research Institute. “But it is unlikely the government actually will intervene in the market.”
The yen has strengthened steadily from about ¥93.00 to the dollar at the start of this month as Fujii said he did not see a need to weaken the Japanese unit for the sake of the country’s exporters and that a strong currency also had benefits.
The US dollar yesterday briefly climbed back above ¥90, reflecting Fujii’s repeated warnings that currency moves were getting too one-sided toward yen rises.