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[MozHawk]

Japanese currency intervention
A fountain of yen
Mar 25th 2004 | TOKYO
From The Economist print edition


Is it drying up?

NO, SAY the Japanese authorities, policy has not changed. Speculation that the Ministry of Finance's buying of dollars on an enormous scale might be ending had pushed the yen up sharply in the week beginning March 15th; denial brought some respite. And on March 23rd Toshihiko Fukui, the governor of the Bank of Japan, restated the central bank's commitment to “quantitative easing”—ie, flooding the money markets with yen until inflation turns positive and looks like staying that way.

And yet, despite all this, the yen has been rising again. On March 24th Standard & Poor's, a rating agency that downgraded Japan three times in 2001 and 2002, said its outlook for the country had brightened, mainly because the economy is getting stronger. Thereafter the yen breached ¥106 to the dollar, its highest point for more than a month (see chart).

The scale of the Bank of Japan's intervention to hold down the yen has been staggering. During January and February, Japan spent ¥10.1 trillion ($95 billion)—equivalent to two-thirds of its current-account surplus last year—trying to weaken the currency. Izuru Kato of Totan Research, a think-tank, believes that a further ¥3 trillion-4 trillion has been spent this month. This would bring the total so far in 2004 to two-thirds that in the whole of 2003, a record-breaking year. As a product of intervention, Japan has been piling up American Treasury bonds: its stash grew by $192 billion to $577 billion in the year to January 31st. China's holdings increased by only one-seventh of that amount.

Currency intervention is often a fool's game, but Japan's seems to have been paying off. Painted as a strategy to prevent a sharp and disorderly appreciation of the yen, the policy of selling yen and buying dollars has helped boost exporters' profits, on which much of the recent recovery has been based. It has also helped to raise stockmarkets and battle deflation.

The policy has also been downright profitable. With Japanese interest rates close to zero, the cost of funding the intervention by issuing short-term bills to pay for dollar purchases is tiny. Dollar interest rates, though low in historical terms, are much higher, allowing the government to pocket the difference. The government already plans to transfer ¥1.4 trillion of such profits, the equivalent of a 0.8% rise in consumption tax, to its main budget for the next fiscal year, says Masaaki Kanno of J.P. Morgan Securities.

In theory, intervention on a grand scale could continue for some time. There is no shortage of funds: the limit on outstanding financing bills, previously ¥79 trillion, will be raised to ¥140 trillion from next month. Though there are fears that this will put upward pressure on short-term interest rates, in practice, the Bank of Japan can absorb much of the supply. For now, the chances of Japan's short-term interest rates overtaking America's, creating losses for the government, seem small. The main risk is that the yen will rise in spite of intervention, reducing the yen value of Japan's dollar holdings.

And if intervention should stop? Although American exporters might complain about the cheapness of the yen and other Asian currencies, the United States has been a beneficiary of Japan's policy. Intervention has helped finance America's twin deficits and hold down its long-term bond yields. This, in turn has fuelled the booms in consumer spending and the housing market that have pushed the American economy along. It might be awkward on both sides of the Pacific if the lavish funding stopped.

Fonte: The Economist

Um abraço,

MozHawk