August 4, 2011

Japan Takes Steps to Weaken Yen

Swiss move pushes Tokyo to action

japanese flagIn response to a move by Switzerland on Wednesday to weaken the Swiss franc, Japan found itself forced to intervene on behalf of its own currency on Thursday for the third time in less than a year, selling an unspecified quantity of yen on the market.

The New York Times reported that two strategies were employed in Tokyo’s quest to drive down the value of the yen, which has escalated 4% in the past month alone in response to European and American debt woes. Not only did the government intercede in markets, buying dollars and selling yen, but the Bank of Japan announced an expansion of its program to purchase government and corporate bonds.

Switzerland’s move to weaken its currency, as reported by AdvisorOne, took markets by surprise as the country slashed interest rates, already hovering near zero. The franc too has escalated in value as investors fled the dollar and the euro and sought safe-haven currencies. After Switzerland’s action, the yen rose still higher, and the Japanese government acted swiftly to halt its upward rise. Tokyo is also in talks with other countries about its action.

The yen weakened throughout the day on Thursday, from 77.15 yen to the dollar to about 80 yen by Thursday evening in Japan.

Reuters reported that both Switzerland and Japan, having shocked markets, may continue to take steps to weaken their respective currencies, according to analysts. Chris Turner, chief currency strategist at ING, said in a note quoted in the report, "It seems a fresh chapter is opening up in the currency wars, with both Japanese and Swiss officials trying to draw lines in the sand regarding the strength in their currencies they are prepared to tolerate. This is going to be a long and drawn-out campaign, since for Japan the Fed is more likely to cut than hike interest rates and thus the dollar remains pressured, and for the Swiss there seems no resolution to the [euro zone] debt crisis."

The Washington Post reported that the appreciation of the yen is so serious that Japanese authorities are concerned that some of their major manufacturers may move production out of the country. The yen’s high valuation squeezes them on both sides of the equation: it means exported goods cost more, and when funds are brought back home the exchange rate slashes profits

Tokyo’s fears may not be without merit. Honda Motor Co. revealed Monday that the exchange rate obliterated approximately 22.5 billion yen ($282.3 million) from its profits in the most recent quarter. And Akio Toyoda, president of Toyota, was quoted saying at a July news conference, “The current environment makes it unreasonable to keep producing in Japan,” although he added, “[W]e can’t simply abandon domestic production when conditions get tougher.”

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