Japan moves to weaken yen

TOKYO — Japan on Wednesday stepped into the currency markets for the first time since 2004 in a bid to stem the yen's appreciation against the dollar and help safeguard a faltering recovery.

The strident move came a day after Prime Minister Naoto Kan reaffirmed his leadership in a ruling party election victory over Ichiro Ozawa, a heavyweight political rival seen as more likely than Kan to take firm action.

The yen fell to as low as 85.52 to the dollar following the yen-selling intervention, which was triggered by the Japanese unit's earlier surge to a fresh 15-year high of 82.86.

Kan said the yen had "reached the stage where we could not leave it untouched. So, we intervened."

Earlier, Finance Minister Yoshihiko Noda pledged further steps after weeks of trying in vain to talk the yen lower through verbal warnings.

A strong yen puts many Japanese exporters at a disadvantage against foreign rivals as it erodes their repatriated earnings and competitiveness.

Officials did not reveal the size of the intervention but Dow Jones Newswires cited traders saying Tokyo likely sold at least one trillion yen (11.7 billion dollars) during the day.

Authorities continued selling yen into European trading and were prepared to extend the operation into the US session, officials said.

A senior finance ministry official said Japan would step into the market in Tokyo Thursday if needed, Jiji Press reported.

Noda said the move was made unilaterally, but added Japan had been in touch with foreign governments amid qualms from Europe and the United States that exchange rates should be kept free-floating.

"Our country's economy is still in a very severe situation with continued deflation," said Noda. The yen's rapid appreciation "harms the stability of the economy and finances. We cannot tolerate it."

But one top US lawmaker labelled Japan's intervention "deeply disturbing".

"China is not the only country with a predatory exchange rate policy," said Democratic Representative Sander Levin, who chairs the powerful House Ways and Means Committee that has power over taxes and trade policy.

The Bank of Japan indicated it would leave the extra supply of yen sloshing around the money market to bolster lending and weaken the currency, instead of adopting mopping-up policies usually deployed to prevent inflation.

On the contrary, Japan is looking to end years of damaging deflation.

A strong yen makes imports cheaper, prolonging a cycle of deflation that sees consumers defer purchases in the hope of further price falls.

The central bank has come under government pressure to do more to combat the strong yen and recently expanded a multi-billion-dollar loan scheme.

A recent government survey suggested many companies were considering moving production overseas if the yen stayed high, casting a shadow over the nation's recovery.

"Japan needed to intervene in order to try to prevent the yen rising to levels that would push exports lower and send the economy back into recession," said Macquarie Bank's Richard Jerram.

News of the intervention also initially sent the dollar higher against other currencies including the Korean won and Chinese yuan.

Analysts say the region's central banks now have a stronger argument to weaken their currencies and boost the competitiveness of their export sectors, complicating efforts to encourage China to further loosen its currency.

Wednesday's move buoyed Tokyo shares, with the Nikkei index ending up 2.34 percent. Electronics giant Sony jumped 4.09 percent. Toyota Motor soared 3.82 percent.

"Further intervention is likely over coming days and weeks," said Mitul Kotecha, head of global forex strategy with Credit Agricole.

But analysts question how effective Japan's actions will be in the long term, given global moves to keep domestic currencies weak and continuing expectations for further monetary easing in the US.

And while the yen is at 15-year highs on nominal terms, it is still below its 1995 peak when adjusted for price changes and compared to a basket of currencies used by Japan's largest trading partners, say analysts.

The currency hit an all-time high of 79.75 to the dollar in April 1995.