With the Japanese Yen spiking to 15-year highs due to expectations that the US Federal Reserve will soon introduce another round of quantitative easing, Japanese economic policy makers made a surprising announcement Wednesday: they are intervening in the foreign exchange market for the first time in 6 years. The finance ministry and central bank are embarking on a coordinated effort to strengthen exports in beaten-down Japanese manufacturers like Toyota and Sony by buying dollars.
Over the past 6 months traders have continued to seek safe havens in the currency and commodities market as a result of the Fed’s willingness to print piles of money. The result has been a flight to Gold and other currencies, namely the Japanese Yen and Swiss Franc. With Tuesday’s forecasts of further quantitative easing from the Fed and the election victory of Prime Minister Naoto Kan (who was deemed unlikely to allow intervention in the currency market) the Japanese Yen accelerated to highs, and the Bank of Japan decided it was time to act.
For Japan, currency appreciation has a large adverse effect on its economy because it relies so heavily on exports. Toyota Motor Corp., for example, estimates that every 1-yen climb vs. the dollar drains 30 billion yen ($351 million) from earnings. It seems business leader in Japan began to lean on the government for help, although history has shown that such intervention may be short lived and simply a case of “spitting in the wind” unless a more comprehensive effort is coordinated with central banks around the world. So far, foreign central banks have resisted such measures. If the Fed does indeed introduce further quantitative easing, it will be a further blow to Japanese efforts to reel in their currency.
