Bloomberg News

Former MOF Official Kato Says Yen Strength Not Justified

February 26, 2012

Feb. 24 (Bloomberg) -- Even with the yen’s slide to a seven-month low this week, the currency remains too strong relative to Japan’s economic fundamentals, said former top currency official Takatoshi Kato.

Japanese policy makers stand ready to intervene in markets again should the currency re-test the postwar records it reached last year, Kato said in an interview in Tokyo yesterday. The yen reached 80.40 per dollar on Feb. 22, the weakest level since July 11 and still 18 percent stronger than its five-year average of 95.14.

“If there is any volatile or disorderly move which could endanger growth, Japan is prepared to intervene,” said Kato, who is now the president of Japan’s Centre for International Finance. Recent declines in the currency may be a “correction,” he said.

The yen’s surge to 76.25 on March 16 prompted coordinated intervention by Group of Seven nations the next day. Kato predicted in July that Japanese officials would act again to weaken it, ahead of the country’s first unilateral intervention that year on Aug. 4.

Japan sold its currency on Oct. 31 and the days that followed after it reached a postwar record of 75.35, drawing criticism from the U.S. Treasury for the unilateral moves.

The fundamental drivers for a currency include economic growth, the current-account balance and industrial production, according to Kato. Japan’s gross domestic product contracted in three of the previous four quarters, while the current-account surplus shrank in 2011 to a 15-year low. January’s trade deficit was the lowest on record, data showed this month.

Korea, Germany

“A substantial appreciation in the currency does hurt at a time when exporters such as South Korea and Germany have been enjoying weaker currencies in the past two to three years,” said Kato, who formerly served as a deputy managing director of the International Monetary Fund. “People took it for granted that Japan would always have a trade surplus, but they may be starting to realize that is not the case.”

The Bank of Japan on Feb. 14 added 10 trillion yen ($124 billion) to an asset purchase program and set an inflation goal of 1 percent. The yen has slid 2.3 percent against the dollar since that day.

“If the 1 percent inflation goal is a clear target, that implies that the Bank of Japan will ease policy aggressively to reach that goal, which will support yen weakness,” Kato said.

The yen tends to strengthen in periods of financial turmoil because Japan’s current-account surplus makes the country less reliant on foreign capital. A stronger local currency hurts the overseas competitiveness of exporters and cuts the value of their overseas income when repatriated.

“I don’t think we have to worry about the yen strengthening rapidly toward 75 per dollar,” said Kato. “The currency has stayed in focus as a stable safe haven, but the market’s view on the yen may be changing a little bit.”

Kato, 70, served at Japan’s Finance Ministry for three decades and held senior positions including vice finance minister for international affairs, the No. 1 currency position.

--Editor:

To contact the reporters on this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net; Shigeki Nozawa in ?? at snozawa1@bloomberg.net

To contact the editor responsible for this story: Brian Fowler at bfowler4@bloomberg.net -0- Feb/24/2012 05:47 GMT


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