- Associated Press - Wednesday, September 15, 2010

TOKYO (AP) — Japan waded into the currency market Wednesday for the first time in six years, buying dollars to weaken the surging yen, which is battering famed Japanese manufacturers like Toyota and Sony after spiking to 15-year highs.

Prime Minister Naoto Kan surviving a leadership challenge the day before had driven the yen to its latest high as currency traders bet that intervention was unlikely on his watch.

The surprise move, a coordinated effort by the Finance Ministry and central bank, shows a newly empowered Mr. Kan stamping his authority on government policy and means the yen is now less of a one-way bet — even if the effects of intervention prove to be short-lived. Japanese officials would not provide a figure for how muchyen the central bank sold in the market.

The currency has risen about 10 percent against the dollar this year, and business leaders were pressing the government for help. The yen’s rise had gained momentum as worries about banks’ exposure to the debt of European countries with stagnating economies triggered a search for safety. The yen and Swiss franc have been the prime havens for investors hoping to safely park their money this summer.

A strong yen hurts Japan’s exporters — the mainstay drivers of the country’s still-fragile economic recovery. It erodes their foreign income when repatriated and makes their products less competitive in overseas markets. Toyota Motor Corp. estimates that every 1-yen climb versus the dollar saps 30 billion yen ($351 million) from earnings.

The government now has a “sense of crisis” about the yen, said Tomoko Fujii, a senior currency strategist at Bank of America Merrill Lynch. Officials fear “further yen appreciation would undermine the Japanese economy,” she said. Earlier in the week, Hitachi Ltd. president Hiroaki Nakanishi urged the government to tackle the strong yen, calling it a “big pressure” while trying to transform one of Japan’s biggest companies into a nimbler operation.

The yen’s rise has also underscored tensions with China. Some officials including the finance minister say China’s purchases of Japanese government bonds might be helping to drive the yen higher even as Beijing keeps its currency tightly controlled to protect the country’s exporters. The yuan has risen less than 1 percent against the dollar since mid-June when Beijing said it would allow it to trade more freely after keeping it virtually unchanged for 18 months.

After the Bank of Japan sold yen on Wednesday morning, the dollar jumped above 85 yen from its earlier low of 82.87 yen. It was the first currency intervention since March 2004. Stock investors cheered the move, sending the Nikkei 225 stock average up by 217.25 points, or 2.3 percent, to close at 9,516.56.

“We have conducted an intervention in order to suppress excessive fluctuations in the currency market,” said Finance Minister Yoshihiko Noda. “We will closely monitor currency developments, and take firm action including intervention,” Mr. Noda said.

But there was widespread skepticism that Tokyo can keep the yen on a tight leash without coordinated action by major central banks around the world. That suggests the stock market’s advance could prove fleeting and that U.S. manufacturers are likely to continue benefiting from a weak dollar.

“The effect from Japan’s solo intervention won’t last very long. We have to see how the U.S. and European monetary authorities would react,” said Yuji Kameoka, chief forex strategist at Daiwa Institute.

Japanese electronics giant Sony Corp. weighed in with a cautious statement, saying that companies could only do so much on their own. “While we welcome the latest currency intervention by the government and Bank of Japan … we hope they will continue to closely monitor foreign exchange trends and take appropriate measures,” it said.

Ms. Fujii, the Bank of America Merrill Lynch strategist, forecasts that the dollar will by year-end break under the all-time low of 79.75 yen hit in 1995.

The dollar’s woes stem in part from market speculation that the Federal Reserve may restart buying Treasurys and other assets this year to try to bolster the U.S. economy. That would likely drive U.S. interest rates even lower, which would make some investments bought in dollars less appealing for investors.

“This could be a very tough time for Japanese authorities if the Fed really implements a massive quantitative easing,” Ms. Fujii said.

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