TOKYO, Feb 13 - Dampening the yen's rise may be one of the few policy tools the Japanese government has left to reflate the economy, with fiscal stimulus constrained by soaring public debt and short-term interest rates stuck at zero. But its massive yen-selling intervention could be reaching a limit, and risks of the policy need to be addressed as the nation piles up government debt and foreign reserves, analysts say.
"The effects of intervention are limited. But what is more frightening is the prospect of a surge in debt at a time when the nation's finances are already in tatters," said Sayuri Kawamura, a senior economist at Japan Research Institute. The government borrows yen by selling short-term government paper to pay for its dollar-buying in the currency market.
Japan sold a record 20.4250 trillion yen ($193.8 billion) in the foreign exchange market last year, followed by over seven trillion yen in January alone, a record for a single month. Authorities are believed to have intervened intermittently since then to slow the yen's rise. Some argue that the yen's rise would have been much steeper if the authorities had not stepped in. Japanese officials worry that a strong yen could harm an export-led recovery. The yen rose some 10 percent against the dollar in 2003, compared with a more than 15 percent rise by the euro against the dollar during the year. It has continued its rise, hitting a three-year high of 105.16 yen to the dollar on Wednesday. On Friday afternoon in Tokyo it was around 105.40 yen. Others say Tokyo's persistent forays into the market are preventing the dollar/yen rate from finding a natural trough, and declining volatility for the currency pair is hindering the market's inherent function. "Intervention is killing the market," said a senior currency dealer at an European bank. Despite that, Japanese authorities may be satisfied to have prevented a sharp rise in the yen, which would have sparked criticism and pressure from politicians and business circles. Currency policy is strictly controlled by the Ministry of Finance (MOF), while the Bank of Japan conducts intervention as the government's agent in the market.
COSTLY INTERVENTION
The costs of such unfettered yen-selling, although not yet evident, may turn out to be high. Official data shows financing bills (FB) for intervention funds totalled 65.46 trillion yen at the end of September. Analysts estimate the amount at around 77 trillion yen as of January. The massive scale of the forays into the market has depleted the government's coffers, and parliament last week approved an extra budget increasing in the amount of debt the government can issue to raise funds for intervention. The government is asking for even more funds in the budget for the year starting in April. If the MOF issues an additional 21 trillion yen from the extra budget, and the full 40 trillion yen earmarked in next year's budget, weekly issuances of FBs would rise to 10 trillion yen, according to calculations by J.P. Morgan. That may be possible now, with short-term interest rates near zero, but any rise in rates would cause a severe headache for the government. Even then, intervention at the present pace would be unsustainable as the government would run out of funds within the year, said Junya Tanase, a currency analyst at J.P. Morgan in Tokyo. The huge interventions have caused Japan's foreign reserves ballooned to a record $741.246 billion in January. Most of the funds are channelled into U.S. Treasuries.
MOF data shows its special account that holds foreign currency assets acquired through intervention will rack up unrealised losses of some 7.79 trillion yen by the end of March. MOF officials have shrugged it off, saying such losses will not be realised unless they buy yen for dollars, which they say is unlikely to happen soon, and that profits from foreign currency assets and other sources are expected to hit 1.43 trillion yen this year. Some suggest the authorities should think of more effective ways to use the funds available. "The current intervention is not working. Authorities need to get the market on their side and there needs to be an element of surprise," former top financial diplomat Eisuke Sakakibara told in a recent interview.//