Currency intervention raises eyebrows

Japan's repeated attempts to check the dollar's fall against the yen by intervening in the currency market is raising concerns among some economists.

Electronic boards at a Tokyo currency trading firm show the dollar at 105.69 yen Wednesday morning.

They question how long this strategy can last and are voicing concern that the government may incur huge losses in its dollar-denominated assets if the greenback's value plunges sharply.

"Technically, Japan can carry out as much yen-selling intervention as it wants. But I expect the United States and Europe will not tolerate it anymore, as the operations clearly go too far," said Koichi Haji, chief economist at NLI Research Institute.

On Wednesday in Tokyo, the dollar dipped below 106 yen and briefly hit its lowest rate in more than three years. Market participants say the dollar's fall was triggered by speculation that Japan may scale down its intervention to dodge criticism at a Feb. 6 meeting of Group of Seven finance ministers.

The meeting will take place in Boca Raton, Fla.

The government spent more than 20 trillion yen on yen-selling operations in 2003 — by far the biggest amount for a single year.

In fact, this figure represents an almost three-fold increase on the former record — the 7.64 trillion yen spent in 1999.

Haji said this strategy has already irritated U.S. manufacturers, which are expected to have a stronger influence on U.S. policies ahead of the presidential election in November.

These manufacturers claim Japan is trying to devalue the yen artificially to boost the exports and profits of its own companies.

Meanwhile, Japan has found it hard to win support from the European Central Bank, with Europe having been the No. 1 victim of the dollar's recent fall.

The euro has risen against the dollar at a much sharper rate than the yen, partly because the ECB has been unable to reach a consensus on euro-selling intervention or on an easier monetary policy due to the different economic fundamentals of member countries, Haji said.

Over the past year, the euro rose by around 20 percent against the dollar, while the yen rose by about 10 percent.

Currency market experts say the dollar could briefly fall below 100 yen anytime later this year in the event that the G7 blasts Japan's intervention strategy or the U.S. economic recovery slows down.

If the dollar declines sharply against the yen, it would trigger further losses in the value of dollar-based assets owned by the Japanese government. The country employs dollars earned by dollar-buying intervention in the form of securities and deposits.

"Such currency losses would eventually result in a financial burden on taxpayers," Haji said.

The government's foreign-currency denominated assets are already expected to see latent losses worth about 8 trillion yen at the end of March, due mainly to the dollar's fall against the yen.

While experts worry about the risk of larger currency losses, the Finance Ministry said it is not a risk unless the government realizes these losses.

"Foreign-exchange rates tend to fluctuate, so they (the latent losses) do not necessarily become a problem soon," Finance Minister Sadakazu Tanigaki said earlier this month.

Experts also point out that there would be further risks in the event that Japan climbs out of deflation and short-term interest rates start to rise.

The government issues short-term securities, known as financial bills, to raise funds for intervention purposes. These bills are sold to banks.

But once the economy recovers and corporate capital demands rise, the heavy issuance of FBs could be a problem, according to Hideo Kumano, senior economist at Dai-Ichi Life Research Institute Inc.

To meet corporate capital demand, banks will have fewer funds to absorb FBs, and the lack of banks' demand for FBs may lead to an increase in short-term interest rates, Kumano said. Short-term rate hikes would then have a negative effect on corporate activities, he added.

Kumano is also concerned that there will not be any scope left for the government to carry out aggressive intervention measures later in the year, if it maintains the current pace.

The upper limit for the amount of funds that the government can spend for yen-selling intervention was set at 79 trillion yen in the fiscal 2003 budget, but the accumulated amount of intervention is expected to have already reached this level.

Late last year, the government decided to raise the limit to 100 trillion yen in the supplementary budget, and to 140 trillion yen in the fiscal 2004 budget.

Experts say financial authorities have spent more than 5 trillion yen on intervention this month. If they continue to do this every month, the accumulated amount will reach the upper limit of 140 trillion yen by the end of fiscal 2004.