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Saturday, Sept. 18, 2010


Long battle in currency markets

Tuesday's intervention in the currency market by the government and the Bank of Japan to prevent a further rise of the yen against the dollar — the first in 6 1/2 years — appears to have worked, at least temporarily. It was as if the government and the BOJ had been waiting for a chance to intervene. They acted right after Prime Minister Naoto Kan had been re-elected chief of the Democratic Party of Japan and the yen had risen to ¥82.80 against the dollar.

To further push an easy money policy and help prevent the yen from strengthening, the BOJ also decided not to intervene in the "sterilization" process — that is, it refrained from selling national bonds and carrying out other operations to recover the yen that had found its way into the market as a result of yen selling and dollar buying.

The intervention Tuesday succeeded in lowering the yen's value by more than ¥2 against the dollar. But what the government and the central bank face is not a short-term problem. They must prepare themselves for a possibly long battle in which they'll have to steer adroitly through the treacherous waters of foreign currency markets.

The big factor behind the strong yen is worries about a downturn in the U.S. and Europe. This concern is not likely to fade soon. Depending on the next moves by the U.S. Federal Reserve and the results of the BOJ's tankan survey of corporate conditions, the yen may strengthen again. The fact that Japan could not get the U.S. and Europe to act in concert with its intervention in currency markets bolsters the view that market pressure for a strong yen are likely to remain.

All Japan was able to do was to ask the U.S. and Europe not to complain when it intervenes in the currency trade. The U.S. and Europe would like to increase their exports by way of relatively weaker currencies. At the very least, there should be tacit agreement among Japan, the U.S. and Europe about an appropriate level of yen value. The government and the BOJ must act carefully so that market intervention will not invite speculative buying of the yen.

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