Japanese Finance Minister Taro Aso said that the government won’t intervene in the currency market for now after the yen strengthened by the most in three years against the dollar.
“We are carefully watching, but we don’t have any immediate intention of taking any action, such as intervention,” the finance minister told reporters in Tokyo today. The yen jumped 0.7 percent to 96.28 per dollar as of 1:47 p.m. local time.
Japan’s currency surged 2.2 percent yesterday, adding to the headwinds of a slide in stocks and volatility in bonds as Prime Minister Shinzo Abe campaigns to revive the world’s third-biggest economy. As attention turns to a Bank of Japan meeting on June 10-11, Governor Haruhiko Kuroda’s actions may be limited by his pledge to avoid “incremental” steps after announcing a plan to double the monetary base over two years.
“Stocks rose and the yen weakened between November and May at a very rapid pace, driven by expectations for Abenomics and Kuroda-nomics, exceeding the pace of the economy’s fundamental improvement,” said Hiroaki Muto, a senior economist in Tokyo at Sumitomo Mitsui Asset Management. “The markets are now going through an adjustment phase from the too-rapid moves.”
Muto said that the “adjustment” is probably temporary because the Japanese economy is making gains. At the same time, he said the government may consider another jolt of fiscal stimulus.
Economy Minister Akira Amari said today that “the markets will focus on improvements to Japan’s real economy and will eventually factor this in and respond accordingly.”
The Topix Index fell 1.9 percent as of 1:48 p.m. in Tokyo, down about 18 percent from a May 22 high. The gauge is still up 22 percent for the year.
Abe said this week that legislation to advance the so-called “third arrow” of Abenomics, measures to boost growth and cut regulation stifling business, won’t be unveiled until autumn. He needs to maintain the momentum of his campaign after weakness in the yen stoked optimism on the prospects for Japanese exporters, with the currency down about 18 percent over the past year.
The Bank of Japan is divided over whether to authorize a measure designed to quell bond-market volatility, with some officials concerned it would return the BOJ to a pattern of incremental steps that failed in the past, people familiar with the discussions said recently.
At issue is whether the board should give its financial markets department the power to double the maturity of loans it extends to banks to two years. An opposing view is that the step is a useful backup in case of a spike in fluctuations in the government bond market, the people said, asking not to be named because the talks are private.
Installed as prime minister after his Liberal Democratic Party won a landslide victory in the lower house of parliament in December, Abe faces a July election for the less powerful upper house, which his party is forecast to win.
“Abe’s government will probably come under pressure to provide more fiscal spending to shore up the economy as the upper-house election approaches,” Muto said. “I expect Abe to decide to draft an additional fiscal spending package.”
The prime minister’s support rate was at 68 percent, according to a Nikkei newspaper poll published May 27. Almost half of the respondents planned to vote for the LDP, compared with 6 percent for the next most popular party, the Democratic Party of Japan. The Nikkei surveyed 921 people May 24-26 and gave no margin of error.
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