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Japan steps in to knock yen down from 15-year high

September 14, 2010 |  9:41 pm

Japan signaled Wednesday that it has had enough with the soaring value of the yen in an economy that has been one of the world’s weakest for two decades.

The government stepped into currency markets to sell the yen and buy dollars for the first time since 2004.  From Bloomberg News:

The yen fell from a 15-year high versus the dollar, tumbling the most in four months, after Japan intervened in markets for the first time in almost six years to curb gains that threaten an export-led recovery.

Japan’s currency fell after Finance Minister Yoshihiko Noda confirmed that the nation had sold the yen.

Japan’s Chief Cabinet Secretary Yoshito Sengoku said he believes the Finance Ministry considers 82 yen per dollar to be the line of defense to keep the strong currency from harming the economy. Sengoku also said the government is seeking to gain the understanding of the U.S. and Europe for the intervention.

The announcement had the desired effect, scaring currency traders away from trying to push the yen higher: In Asian trading the yen backtracked to 85.03 per dollar from 83.04 earlier in the day, which was the strongest level since 1995.

Finmin But even with the backup the yen is just where it was on Aug. 27, and still much stronger than the 110.5 per dollar of August 2008, before the global financial crisis exploded.

Still, the Tokyo Stock Market’s Nikkei-225 index soared 256 points, or 2.8%, to 9,555 in afternoon trading Wednesday. The Nikkei had sunk to a 16-month low of 8,824 on Aug. 31, battered in part by fears that the country’s leading exporters could see profits shrink if the yen continued to strengthen.

The intervention announcement was a surprise because Prime Minister Naoto Kan had just won reelection as the head of Japan’s ruling party, defeating a rival who had pledged to push down the yen if elected. Kan’s stance on the issue had been less strident.

The yen has mostly been rising against the dollar since mid-2007, even though Japan’s rock-bottom interest rates -- the world's lowest -- and its struggling economy would seem to argue for a weak currency compared with other countries.

Instead, the yen has benefited from Japan’s ongoing trade surplus (earnings from abroad must be channeled into yen at home) and this year from surprising Chinese demand for Japanese short-term debt as China has diversified its massive investment holdings away from the dollar.

Despite its aging population and huge government debt load, Japan and the yen have been viewed by some foreign investors as safer havens than the U.S. in the aftermath of the 2008 financial crisis.

It isn't clear that Japan’s intervention against the yen will succeed. If it doesn't, traders could be emboldened to push the yen even higher. What's more, any attempt to weaken the yen significantly could bring howls from U.S. manufacturers that have benefited as Japanese exporters have been squeezed by the currency shifts.

We live in a global economy in which very few countries want a strong currency. The weaker your currency the cheaper your exports get for foreign buyers. In a world glutted with unused industrial capacity and with labor, everyone's looking for someone to buy their stuff.

-- Tom Petruno

Photo: A security guard stands outside the Japanese Finance Ministry in Tokyo. Credit: Yuriko Nakao / Reuters