13 December 2001, 13:23  : Japan steps up weak yen campaign amid BOJ talk

By Mariko Hayashibara and Yuko Ohba
Japan's subtle campaign to weaken the yen is being seen as an effort to take some of the heat out of arguments that the Bank of Japan (BOJ) should buy foreign bonds to weaken the currency, analysts said on Thursday.
Ministry officials, in public and private, have become much more vocal in recent days in voicing their approval of a further weakening of the yen, but they want a gradual decline so as not to spook foreign investors, the analysts said.
Market sources said ministry officials, in a rare move, contacted some currency strategists this week and made it clear they felt the yen was not aligned with economic fundamentals and that the ministry would be content to see it fall further.
Japan's top financial diplomat, Haruhiko Kuroda, said as much on Wednesday when he said the recent decline in the yen was just "an adjustment after strengthening too much".
The message is clear, analysts said. "The MOF seems to have taken an apparent yen weakening stance, although problems remain as to whether other countries will accept it," said Kosuke Hanao, head of foreign exchange at Royal Bank of Scotland in Tokyo.
Several politicians and at least one member of the BOJ Policy Board have been calling for the BOJ to buy foreign bonds as a way to ease monetary policy by injecting liquidity into the market. This would also have the effect of weakening the yen.
But Finance Minister Masajuro Shiokawa told a parliamentary session on Thursday: "The BOJ should refrain from policies that could be suspected as currency intervention."
Analysts said such remarks were meant to emphasise that the MOF wanted the yen to weaken naturally and that BOJ bond purchases should be seen purely as a matter of monetary policy.
Vice Finance Minister Toshiro Muto said on Monday that simply targeting a weaker yen would not get international approval.
Analysts said the ministry was obviously concerned about volatility in the foreign exchange market.
"The MOF probably is very concerned about the possibility of a sudden fall or a rise in dollar/yen, especially as the BOJ's foreign bond purchasing is unlikely happen soon, if at all," said Toru Umemoto, currency strategist at Morgan Stanley Japan.
Offshore funds have been actively selling the yen recently as speculation mounted that foreign bond purchases would go ahead.
Umemoto and other analysts shared a view that offshore investors may buy back the yen if the talk of the BOJ buying foreign bonds starts to wane.

NO MOVE SOON
Many analysts see little chance that the BOJ will decide on the issue when its Policy Board meets on December 18 and 19.
The BOJ has few policy options left, having already driven interest rates down to close to zero.
"One measure left is the foreign bond buying, but the reality is low...as this would inevitably affect the forex market and would become an issue in international politics," said Seiji Shiraishi, chief market economist at Daiwa Securities SMBC.
BOJ Governor Masaru Hayami acknowledged on Thursday it would be difficult for the central bank to buy foreign bonds due to legal issues that prohibit it from manipulating currency rates.
Dealers and analysts said the MOF's jawboning intervention was also seen as a sign of its growing irritation with the BOJ.
"The truth seems to be that the MOF doesn't want the BOJ to step into their foreign exchange territory," said Kaneo Ogino, head of forex trading at Hongkong and Shanghai Bank in Tokyo.

UNORTHODOX MEASURES
Japanese politicians have been making louder calls for unorthodox policy measures in recent days after confirmation that the economy is in recession and the likelihood that unemployment, already at a record high 5.4 percent, will continue to rise.
The weakening of the yen is the last resort, Ogino said.
Analysts said the MOF's louder stance on weakening the yen may also be a result of some sort of agreement with the U.S. authorities, although this is denied by the U.S. Treasury.
Hedge fund group Medley Global Advisors quoted a U.S. official this week as saying there was no lower limit on the yen and that the United States would support Tokyo's buying of U.S. bonds to soften the Japanese currency.
"This report does not represent Treasury's position," a Treasury spokesman said.
U.S. Treasury Secretary Paul O'Neill, who is responsible for foreign exchange policy, has repeatedly stated he believes in the strong U.S. dollar policy set up by the previous administration.
The yen on Thursday fell to around 126.60 per dollar , a fresh eight-month low and close to this year's low of 126.82. Expectations are growing in the market that the yen could fall to 130 in the near term.

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