A senior official warned yesterday that Japan would take decisive action against rapid fluctuations of the yen, reflecting growing concern that economic recovery is being stifled by a strengthening of the currency.
The signal from Mr Toshiro Muto, vice-finance minister, of possible intervention came on the same day that the Nikkei average notched up its longest losing streak in 11 years, with yen-sensitive exporters particularly heavy casualties.
On Friday the yen rose to a one-month high against the dollar at Y120.3, and was hovering around Y120.6 yesterday, prompting investors to unload shares of Japan's biggest exporters, including Sony and Canon. The Nikkei average lost 0.8 per cent to 8,450.94, its first nine-day losing streak since September 1991.
Mr Satoru Ogasawara, currency strategist with Credit Suisse First Boston, said officials were "hoping verbal intervention alone will stop the pace of the yen's appreciation".
However yesterday Prime Minister Mr Junichiro Koizumi added to a growing body of evidence that his government, which regards the yen's rise as reflecting external weaknesses rather than any significant improvement in its own economy, would welcome a currency depreciation.
He said the new governor of the Bank of Japan (BoJ) should support an aggressive anti-deflation policy. Mr Koizumi must choose a new BoJ governor by March.
If the new governor adopted an inflation target or increase the bank's purchases of government bonds, the yen would probably fall, according to currency experts.
Marked depreciation of the yen could help in the four-year battle against deflation by lowering the price of imports.
Mr Masaru Hayami, the current BoJ governor, has been staunchly opposed to an inflation target and has supported a strong currency.
Debate about who should head the BoJ comes at a time when the economy, just emerging from recession, appears to be on the brink of another downturn.
According to the influential Tankan survey of business sentiment released on Friday, Japan's biggest manufacturers foresee a worsening of conditions in the near term and plan to slash capital spending by 10.7 per cent in the year to March.
A substantial depreciation of the yen remains one of the few policy options open to a government that appears to have exhausted all monetary and fiscal policies.
- (Financial Times Service)
