Bloomberg News

Yen Record After BOJ Move May Encourage Japan to Aid Europe

October 28, 2011

(Updates with Furukawa comment in fifth paragraph.)

Oct. 28 (Bloomberg) -- Aiding Europe may be Japan’s best bet for weakening the yen after an expansion of central-bank stimulus yesterday failed to stop the currency from advancing to another postwar high.

The Bank of Japan added 5 trillion yen ($66 billion) to an asset-purchase program after Europe announced an enlarged rescue fund to counter the region’s debt crisis. JPMorgan Chase & Co. and Morgan Stanley MUFG Securities Co. said the central bank’s measure was too little. The yen traded at 75.84 per dollar as of 12:35 p.m. local time today after rising to 75.66 yesterday.

A report today showed Japan’s industrial production slid more than analysts forecast in September, underscoring the threat that yen gains pose to exporters like Nintendo Co. An easing of Europe’s sovereign-debt woes may diminish the currency’s appeal as a haven. Japan plans to support the increase in the fund and is awaiting details, a person familiar with the matter said yesterday.

“It’s in Japan’s interest to support this initiative,” said Takuji Okubo, chief Japan economist at Societe Generale in Tokyo. “Europeans are desperate right now. If Japan puts money in the fund and the euro strengthens and the yen weakens, European leaders will accept that.”

Intervention Warning

The yen rose against the dollar yesterday after the central bank unveiled measures that Governor Masaaki Shirakawa said were intended to respond to currency appreciation and fallout from the European crisis. National Strategy Minister Motohisa Furukawa said today officials will take decisive steps on the yen if needed, signaling that the government is ready to intervene after doing so in March and August.

Japan anticipates waiting until November for specifics on how it may be able to help with the European rescue effort, a second person said, with both speaking on condition of anonymity because the discussions are private.

European officials have said that the European Financial Stability Facility will be used to insure bond sales and create a special investment vehicle that would court outside money, from public and private financial institutions and investors. Japan bought more than 20 percent of the first European financial-stability bonds in January.

Japan’s factory production slid 4 percent in September from the previous month, the first decline since the March earthquake that left about 19,000 people dead or missing and worse than any of 28 forecasts in a Bloomberg News survey. The jobless rate unexpectedly fell to 4.1 percent from 4.3 percent in August, while consumer prices excluding fresh food prices rose 0.2 percent from a year earlier last month, other government reports today showed.

BOJ’s Forecast

The Bank of Japan yesterday cut its economic growth forecast to 2.2 percent for the year starting April 2012, less than a July estimate of 2.9 percent.

Shirakawa said yesterday that the central bank is “always thinking of how we can best contribute to the stability of Europe’s financial markets,” while declining to comment on aid for the region.

Klaus Regling, chief executive officer of the ESFS, is planning to visit Tokyo after traveling to Beijing, Agence France-Presse reported, citing a European Union official in Asia. China and Japan are the world’s two largest holders of foreign-currency reserves.

French President Nicolas Sarkozy and Chinese counterpart Hu Jintao discussed the rescue effort in a phone call yesterday, while at a Chinese foreign ministry briefing, spokeswoman Jiang Yu said her nation is ready to work with Europe to stabilize markets.

‘Exotic’ Option

“This is one of the exotic policy options out there -- to try to help the Europeans and on the way weakening the yen,” said Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo who used to do research for the Bank of Japan. “By helping Europe, the Japanese could bribe the European leaders” to stay quiet when the aid results in the yen weakening against the euro, he said.

In one of the latest signs of the toll from the yen’s gains, Elpida Memory Inc., the world’s third-largest memory chipmaker, said yesterday that it plans to shift output capacity of 50,000 chip wafers a month from its plant in Hiroshima, western Japan, to Taiwan.

The exchange rate left the company “no choice,” Elpida President Yukio Sakamoto said in Tokyo.

Nikkei Gains

The Bank of Japan’s policy board may have been encouraged by a rebound in stocks and the euro after European leaders persuaded bondholders to take 50 percent losses on Greek debt and boosted the firepower of the rescue fund to 1 trillion euros ($1.4 trillion), according to Masaaki Kanno, a former central bank official. The Nikkei 225 Stock Average gained 1.6 percent at 9:45 a.m. in Tokyo after closing 2 percent higher yesterday.

“It’s possible that they saw a solid market response after the European meeting and thought they’d have time until the next meeting,” said Kanno, who is now chief economist at JPMorgan in Tokyo. “The BOJ may have to succumb to holding an emergency meeting” if Europe’s pledges fail to calm markets and the U.S. Federal Reserve eases monetary policy at its next gathering, he said.

The currency’s climb led Nintendo, the world’s largest maker of video-game machines, to forecast yesterday its first annual loss in at least 30 years. The Kyoto-based company said the deficit may be 20 billion yen for the year ending in March compared with a previous projection of a 20 billion yen profit.

Monetary Stimulus

Shirakawa and his policy board expanded their credit and asset-purchase programs to a total of 55 trillion yen in an 8 to 1 vote. They kept the overnight lending rate between zero and 0.1 percent.

The central bank increased its asset-purchase fund to 20 trillion yen from 15 trillion yen and kept its fixed-rate lending program unchanged at 35 trillion yen. All of the additional funds will be used to buy Japanese government bonds. Board member Ryuzo Miyao opposed the decision, calling instead for an additional 10 trillion yen in stimulus.

The move was the “absolute lowest limit of what is needed,” said Takehiro Sato, chief economist at Morgan Stanley MUFG. JPMorgan’s Kanno said the central bank could have made the stimulus more effective by increasing purchases by 10 trillion yen or buying bonds with longer maturities.

Prime Minister Yoshihiko Noda’s cabinet last week approved a 12.1 trillion yen spending plan to rebuild after the March disaster and to help companies cope with the currency. Politicians are spending 2 trillion yen to spur investment and hiring and are also setting aside foreign-exchange reserves to aid exports and bolster overseas acquisitions.

Economists say a rebound in production and rebuilding demand has likely ended a slump in gross domestic product and the BOJ said that growth will accelerate in the next fiscal year.

--With assistance from Misato Watanabe, Masahiro Hidaka, Yuki Yamaguchi and Chris Anstey in Tokyo. Editors: Paul Panckhurst, Ken McCallum

To contact the reporters on this story: Aki Ito in Tokyo at aito16@bloomberg.net; Andy Sharp in Tokyo at asharp5@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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