Currency intervention may be required by Japanese Government

| November 27, 2009
Currency intervention may be required by Japanese Government

The US dollar continued its slide today against the Japanese yen, falling to a 14-year low.

The greenback dipped to 84 yen – its lowest level since 1995, due in part to the Federal Reserve indicating that US interest rates will remain low.

Earlier this week, Yutaka Miura at Mizuho Securities said: “This yen strengthening is caused by dollar selling rather than yen buying, so this is not something Japan can handle itself.”

“This trend will continue unless the Japanese government takes action, in co-operation with the US.”

However, Japan has not intervened on foreign exchange markets in almost six years, allowing the yen to find its own level.

According to Japan’s finance minister, Hirohisa Fujii, the Government is monitoring the yen but has not yet suggested immediate intervention.

However, there are signals that Tokyo is increasing its warnings of the chance of currency intervention.

After a cabinet meeting, Fujii told reporters: “I would respond flexibly to a joint statement on currencies.”

The Government has not stepped in since March 2004 but many central banks do intervene in foreign-exchange markets by selling and buying currencies.

In the meantime, while a strong yen is good news for the economy, it makes Japanese exports less competitive – but means imports are more affordable to Japanese consumers.

Exports are a key to the economy‘s recovery.

There are also concerns for the world’s no.2 economy after Naoto Kan, Japan’s deputy prime minister, recently acknowledged that deflation has returned for the first time since 2006.

A short period of deflation (where prices fall rather than increase) could be a serious threat to the economy because it deters consumers and businesses from spending in expectation of falling prices.

Deflation was a problem for Japan during its so-called “Lost Decade” in the 1990s.

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