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Tuesday 19th of January 2010
January 7, 2010    

Currency intervention may be required in Japan

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by Kay Murchie
Currency intervention may be required in Japan

Naoto Kan, Japan’s newly appointed finance minister, is calling for a weaker yen after the Japanese currency continues to gain strength against the US dollar.

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.

Kan’s predecessor, Hirohisa Fujii, who resigned for health reasons, was criticised for tolerating a strong yen.

Sixty-three-year-old Kan said he will work with the central bank to drive the yen to an appropriate level - considered to be about 95 yen to one US dollar.

He told reporters: “I will deal with it seriously and work hard to bring it to the appropriate level, considering the impact that foreign exchange has on the Japanese economy.”

In November, the yen reached a 14-year high against the US dollar and, at the time, there was speculation that the Government would take action.

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

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

Japan, which is the world’s no.2 economy, is also battling with deflation. 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.

The economy is also struggling under massive Government debt. Japan’s public debt is close to the equivalent of 200% of GDP.

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