Japan tamed financial markets and successfully pushed down the value of its currency yesterday, but stalling economic growth in the West and the latest leg of the eurozone crisis suggest that its victory may be shortlived.
Fearful that the rising yen would crimp exports and damage Japan's earthquake-ravaged economy, the Bank of Japan made its third major intervention in currency markets in a year, selling yen and pushing the value of the currency down 4 per cent against the US dollar. The yen had risen 5 per cent against the dollar over the past month.
Part of that early gain had beenreversed within 18 hours, however, and by lunchtime in New York last night the yen was trading at 78.92 to the dollar, down 2.4 per cent. The Japanese currency was also down 1.3 per cent against the euro.
The BoJ's intervention came just a day after Switzerland's central bank also decided to act to curb its rising currency by cutting interest rates. The Swiss franc has become traders' safe haven of choice during the eurozone and US debt crises, while the yen has benefited from the likelihood that interest rates, and therefore investment returns, in the US are likely to remain very low for a long period.
Yesterday's downward pressure on the yen is unlikely to be maintained, said David Rea, Japan economist at Capital Economics. "Intervention is more likely to be effective when it is seeking to reinforce a market trend, not work against it," he warned.
"There are several reasons to be sceptical. Investors' concerns aboutglobal sovereign indebtedness are unlikely to disappear anytime soon. The prop that these have provided to the yen may therefore remain in place for a while yet, despite Japan's own serious fiscal predicament. Second, the deterioration in the global economic outlook has reduced interest rate expectations elsewhere, and raised the possibility of additional quantitative easing in the US. Third, Japan has acted alone without the explicit support of its G7 partners."
Last year, Brazil warned of the dangers of a "currency war" and competitive devaluations by countries that want to support their exporters. The dollar has drifted lower as expectations for the US recovery have faded and concerns about the size of government debt have come to the fore, and talk that the Federal Reserve may introduce new measures to inflate the economy have put further downward pressure on the currency in recent days.