Bloomberg News

Japan to Boost Fund to Help With Strong Yen to $130 Billion

October 20, 2011

(Adds analyst comment in ninth paragraph.)

Oct. 20 (Bloomberg) -- Japan will increase a fund to help companies cope with a surging yen by about 25 percent to 10 trillion yen ($130 billion), according to a document obtained from a ruling Democratic Party of Japan official.

The government will increase from 8 trillion yen the foreign-exchange reserves being shifted to the state-run Japan Bank for International Cooperation to aid exporters and spur acquisitions overseas. The cabinet is scheduled to agree on the plan at a meeting tomorrow, according to the document.

The yen’s rise to a record high of 75.95 to the dollar on Aug. 19 prompted the government to adopt a two-pronged approach to currency policy. In addition to continuing to threaten intervention, Japanese authorities have been highlighting the benefits of the strong yen. Cheaper overseas acquisitions aid a nation that imports about 80 percent of its energy needs.

The plan could be “very effective” in encouraging overseas investments, said Minori Uchida, a senior analyst in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd. “Japan’s companies are struggling under the most severe environment ever at the moment.”

The yen strengthened 0.1 percent to 76.73 against the dollar at 4:18 p.m. in Tokyo. The Japanese currency has risen 5.7 percent versus the dollar and 3.3 percent against the euro year to date.

‘Mr. Yen’

Former Japanese Finance Ministry official Eisuke Sakakibara said yesterday at a conference in Tokyo that Japan’s currency may gain past 100 per euro and strengthen to the low 70s versus the greenback. Japan may intervene to weaken the yen, though such efforts will only be successful if coordinated with other nations, said Sakakibara, who became known as “Mr. Yen” during his 1997-1999 tenure at the Ministry of Finance.

In addition to the increase in reserves, which was agreed upon by the ruling DPJ today, the document also calls for the Bank of Japan to use “appropriate and bold monetary policy management” of the yen in close coordination with the government.

The government will continue to fight to prevent what it perceives to be the recent one-way rise in the yen, according to the document. “Excessive fluctuations in the currency market can have an adverse impact on the economy and financial markets, so we will continue to monitor the situation closely and rule nothing out, taking bold steps as needed,” the document said.

‘Limited’ Impact

The steps outlined in the government’s plan are intended to bolster the economy so it can expand even while the yen is strong, said Koji Takeuchi, a senior economist at Mizuho Research Institute in Tokyo. “Short-term impact on the yen will be limited,” he said.

The document said the government will also establish five special economic zones, where companies will get special benefits and tax breaks to help them compete internationally, by the end of the year. The cabinet tomorrow will also detail a fund to help encourage the use of alternative-energy sources such as solar energy and fuel cells, the document said.

Authorities will also increase loan guarantees for the Innovation Network Corporation of Japan, a venture created in 2009 to promote innovation. The INCJ will be able to invest up to 1.8 trillion yen with support from the government and private companies, up from 800 billion yen, aiding mergers and acquisitions overseas.

“The Japanese economy is still suffering from deflation and it’s important to prevent a vicious cycle of a strong yen intensifying deflation and deflation strengthening the yen,” according to the 13-page document. Japan should make the “most of the merits” of the strong yen by pursuing oil and natural gas as well as rare-earth assets overseas, it said.

--With assistance from Kyoko Shimodoi, Monami Yui, Patrick Harrington and Kazumi Miura in Tokyo. Editors: Patrick Harrington, Mark Williams

To contact the reporters on this story: Takashi Hirokawa in Tokyo at thirokawa@bloomberg.net; Sachiko Sakamaki in Tokyo at ssakamaki1@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net


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