TOKYO, Feb 9 - There was a little something for everyone in the statement by the G7 rich nations on currencies. For Japan, analysts said, it can lay claim that its policy of massive dollar-buying intervention has been vindicated. The upshot is that Japan will continue to buy dollars and sell yen in order to keep the Japanese currency from rising too quickly against the greenback in a bid to protect exports. Before the G7 meeting, there were concerns that Japan would be taken to task for trying to manipulate the currency market.
The communique from the Group of Seven meeting in Florida stated a distaste for "excess volatility" while re-emphasising "flexibility" in exchange rates, highlighting Europe's concern that the fall of the dollar has been lopsided against the euro. "The G7 is calling excessive volatility unacceptable and that is the basic argument Japan has used for its intervention," said Naomi Fink, currency strategist at BNP Paribas in Tokyo. Japanese officials embraced the overall G7 statement, but brushed aside the flexibility argument, noting that the yen fell after the previous G7 meeting in Dubai in September. On Monday, Zembei Mizoguchi, Japan's vice finance minister for international affairs, said the Ministry of Finance would continue to act in the foreign exchange market if rates strayed from economic fundamentals and turned volatile. For Washington's part, Treasury Secretary John Snow repeated at the meeting the ad nauseum statement that he believed in a "strong dollar" policy with rates set by market mechanisms. The market again ignored his statement, taking it as tacit lip service to the dollar's decline, a condition that helps narrow the U.S. current account deficit and aid U.S. corporate profits in an election year. The dollar did gain back some ground against the yen on Monday but largely stabilised around 105.60 yen , trading in a tight range and up only 0.19 percent from New York's close. "For dollar/yen I think we see more of the same, with a return to intervention," said Fink. "Japan will have a growing current account surplus based upon a continuation of the global (economic) recovery, in Asia especially," she said. "On net, it will be a slow strengthening for the yen given economic and market forces and they will continue to intervene to counteract this."
RECORD INTERVENTION
Many expect the dollar to test the 100 yen level in coming weeks after it hit a three-year low of 105.22 yen last week. Trying to rein in the yen, Japan sold a record 20 trillion yen ($190 billion) in 2003 and a further seven trillion in January, which helped to control the dollar's slide and give exporters breathing room to prepare for further weakness. A stronger yen against the dollar makes Japanese products more expensive on the global market and cuts into corporate profits when overseas earnings are converted to local currency. Japan can theoretically intervene with dollar buying and yen selling indefinitely, given that Japanese interest rates are effectively zero.
Plus, the interest earnings from holding short-term U.S. Treasuries more than makes up for losses, so far, in holding an asset with a declining value. Kosuke Hanao, head of foreign exchange sales at Royal Bank of Scotland in Tokyo, said there was speculation in the market that the current situation was agreeable to both Tokyo and Washington. Under this scenario, he said, "it is acceptable for Japan to have the yen around 105, not below 100." He also noted that there was a sense in the market that some intervention by Japan was acceptable for the United States because the Bank of Japan bought a huge amount of U.S. Treasuries, helping out Washington with its budget deficit. "If these reports are true, that is good for the Japanese economy as a whole because it would postpone the appreciation of the yen and help the export sector," Hanao added. After the September G7 meeting, where the "flexibility" phrase was introduced, the dollar fell across the board, losing 7.5 percent against the yen and 11.5 percent against the euro . "I think the current trend of gradual decline in the dollar remains unchanged since the statement is not aimed at stopping the weakening of the dollar," said Toshiaki Kimura, group manager of forex trading at Mitsubishi Trust and Banking in Tokyo. "The statement included both the need for flexibility and a warning against excess volatility," he said. "Since it has what the U.S., Japan and Europe all wanted to see in the communique, it will be difficult for the market to set a clear trend on this."//