Bloomberg News

Bank of Japan Warns Yen May Gain Two Days After Intervention

November 02, 2011

(Updates with Shirai’s comment in the seventh paragraph.)

Nov. 2 (Bloomberg) -- A Bank of Japan board member warned that the yen may strengthen further, two days after the government intervened to protect exporters by weakening the currency from a postwar record against the dollar.

“We could see the yen, regarded as a relatively safe currency, rise even further” should investors’ risk aversion intensify over a deepening European crisis, the official, Sayuri Shirai, said in a speech today in Kofu, central Japan.

Authorities sold the yen on Oct. 31 after the currency surged to its highest level since World War II in what Barclays Bank Plc and Totan Research Co. estimate was a record intervention in foreign-exchange markets. Japan’s government faces almost 40 trillion yen ($512 billion) in losses from its past yen sales because of the currency’s appreciation, according to estimates by JPMorgan Chase & Co.

“Shirai’s comments suggest that she is aware the BOJ will likely have to do more if the impact of the European crisis on Japan becomes clearer,” said Mari Iwashita, chief market economist at SMBC Nikko Securities Inc. in Tokyo. “The European economy is Shirai’s area of expertise and she knows we can’t be optimistic about the outlook.”

The central bank last week bolstered monetary stimulus by expanding its planned purchases of government bonds by 5 trillion yen. Shirai, a former International Monetary Fund economist who has published works on European fiscal policy, said Japan’s exports could be hurt by developments in Europe because the crisis may also damp demand from Japan’s other trading partners.

Market Distortions

Shirai said the central bank would also need to be careful and make sure that further asset purchases wouldn’t create imbalances in financial markets.

’’We should minimize the chance of distorting markets and I’m very cautious about that’’ when the BOJ buys assets, Shirai said at a press conference in Kofu after her speech. ’’In principle, the market is healthy when it is determined by the balance of supply and demand. We will take into account that when we consider measures.’’

Japanese stocks slid for a third day today, the longest losing streak in a month, on concern that a Greek referendum will threaten Europe’s rescue plan. The Nikkei 225 Stock Average fell 2.2 percent at the 3 p.m. close in Tokyo.

“It’s better to assume we’ll continue to see heightened tension in global financial markets for some time,” Shirai said.

‘Out of Nowhere’

The yen traded at 78.12 per dollar at 3:48 p.m., extending gains after Greece’s referendum announcement, a development Japanese Finance Minister Jun Azumi told reporters in Tokyo today people were “perplexed” about and something that “came out of nowhere.”

Exporters from Sony Corp. to Panasonic Corp. have cited the appreciating currency among reasons for lowering their earnings forecasts. Sony today said it would be unprofitable this fiscal year after reporting an unexpected quarterly loss because of the strong yen. Panasonic, the maker of Viera televisions, this week forecast a full-year loss of 420 billion yen, its biggest in a decade.

The BOJ estimated yesterday that deposits climbed 7.7 trillion yen to a total 37.2 trillion yen. The figure suggests that the government sold approximately 8 trillion yen on Oct. 31, said Yuichi Takahashi, a market economist at Totan Research in Tokyo. Japan sold 4.51 trillion yen in August, according to finance ministry data.

Extra Cash

The central bank will forgo draining yen funds that have entered the market after intervention, a person familiar with the matter said. Leaving the yen funds in the market would suggest that the BOJ wants to bolster the effects of its monetary stimulus by keeping the extra cash available to the market.

Valuation losses on Japan’s foreign-exchange reserves minus yen liabilities totaled 35.3 trillion yen at the end of 2010, according to finance ministry data. The losses may swell further as the yen is projected to climb to 72 versus the dollar by September 2012, said Tohru Sasaki, head of Japan rates and foreign-exchange research at JPMorgan Chase in Tokyo.

--With assistance from Mayumi Otsuma, Shigeki Nozawa, Saburo Funabiki, Monami Yui and Masahiro Hidaka in Tokyo. Editors: Lily Nonomiya, Ken McCallum

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

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


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