Back to near zero? Japan clobbers yen with rate-cut talk
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Maybe the Japanese are worried that the U.S. wants to grab the coveted title of ‘Home of the World’s Lowest Interest Rates.’
The yen plunged in value against the dollar Tuesday after the Nikkei newspaper in Tokyo reported that the Bank of Japan may slash its benchmark interest rate at a meeting on Friday.
That rate now is just 0.50%. Policymakers may cut it in half, to 0.25%, Nikkei reported. That would take the rate back to where it was in 2006, when Japan raised it after mostly maintaining a zero-interest policy since 1999 -- one measure of how grave the situation was in the Japanese economy and banking system.
Meanwhile, with the U.S. economy on the ropes, the Federal Reserve on Wednesday is expected to drop its key short-term rate to 1% from the current 1.5%, getting closer to Japan’s rate.
Rumors of a Japanese cut helped fuel a dramatic reversal in the yen, which had been rocketing against the dollar and other currencies in recent weeks -- triggering deep concerns about Japan’s export economy. A strong yen forces exporters either to raise prices or suffer squeezed profit margins.
The dollar was worth 97.68 yen in New York late Tuesday, up from a 13-year low of 93.93 on Monday but still well below the rate of 110 yen in mid-August.
From Bloomberg News:
The gain in the yen has eroded Japanese exporters’ overseas income. Honda Motor Co., Japan’s second-largest automaker, cut its operating profit forecast for the year ended in March by 13% to 550 billion yen, or $5.6 billion. Nikkei reported that Japan’s economic growth forecast for 2009 is likely to be cut to [a range of] 0.5% to 1%, from a prior projection of 1.5%. ‘The first motivation for a potential rate cut is to stem the yen’s appreciation,’ said Paresh Upadhyaya, who helps manage $50 billion in currency assets at Putnam Investments in Boston. ‘The second motivation is to try to prop up the economy.’
The yen has surged since late August as the global credit crisis has worsened and assets including stocks and commodities have plummeted in value. That has spurred Japanese investors to bring their money home from abroad, boosting demand for yen.
By lowering its already rock-bottom interest rates, the Bank of Japan could make the yen less attractive relative to other currencies.
A rebound in Japanese stock prices on Tuesday also helped to reinvigorate the yen. The Nikkei-225 share index jumped 6.4%, to 7,621.92, after closing at a 26-year low on Monday.