Japan’s economic plan ‘backfiring’ as yen surges

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The currency hit a fresh high of 107.6 against the dollar, threatening government hopes of stronger growth and raising prospect of forex intervention

Japans finance minister Taro Aso has ratcheted up the warning against a rapid rise in the yen as the countrys ultra-dovish monetary policy implodes and threatens to condemn the economy to continued stagnation.

Although it recovered slightly in Asian trading on Friday, the US dollar fell below 108 yen for the first time in 17 months on Thursday with investors betting that Japan would refrain from intervention. The yen has risen 12% against the greenback this year.

Aso said that the government, which wants a lower yen in order to fire exports and reverse years of weak growth as part of prime minister Shinzo Abes so-called Abe-nomics plan, would take steps as needed to counter one-sided moves in the currency market.

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The yen has appreciated against the dollar, moving from more than 111 yen per dollar on Monday to 107.5 on Thursday. Photograph: Yahoo/Yahoo Finance

The Bank of Japan surprised investors earlier this year when it announced a move towards negative interest rates in the hope of spurring investment and keeping the yen low. But the currency has instead surged, helped by a falling US dollar and the yens traditional position as a safe haven in times of concern about the global economy.

A rapid move toward either yen rise or yen fall is not desirable. It is desirable that currencies are stable at levels that match the economys fundamentals, Aso told reporters after a cabinet meeting on Friday.

As the G20 confirms, excess volatility and disorderly moves in the exchange market hurts (economy), so we are watching currency moves with a sense of urgency. We will take necessary steps under certain circumstances, he said.

The surging yen has also hurt share prices in Japan. The Nikkei average has fallen sharply in inverse relation to the yen in recent weeks. It was up slightly on Friday but other markets in Asia were down. The ASX in Australia was down 0.6% at 5.30am BST while the Shanghai Composite index in China was down nearly 1%.

He declined to comment on the possibility of intervention in the foreign exchange market, but many observers believe Japans hands are tied by the upcoming G7 summit to be hosted by prime minister Shinzo Abe on Kashiko Island in May.

Jeffrey Gundlach, the widely followed investor who runs DoubleLine Capital, said late on Thursday that negative interest rates implemented by some major central banks, notably in Japan, were having the opposite effect.

The negative interest rate experiment seems to be backfiring, Gundlach said. The best evidence of negative interest rates backfiring is the yen versus the dollar.

The European Central Bank has also moved towards negative rates but the eurozone is still struggling to reverse years of anaemic growth.

The dollar last traded at around 108.90 yen, cooling exporter sentiment and weighing heavily on Japans fight against deflation. With both external and domestic demand weakening, Japan is seen teetering on the edge of another recession.

Economy minister Nobuteru Ishihara suggested that there may be speculative moves behind the recent yen gains, saying that he does not see any domestic economic factors that would cause the yen to rise.

The government is closely watching moves by speculative players in the foreign exchange market, he told a separate news conference.

A finance ministry official was quoted by Jiji newsagency as saying that the recent moves in the foreign exchange market was driven by speculators.

While global concerns over a currency war linger, Japan has stayed away from the markets since it last intervened in November 2011 to stem a strong yen.

Read more: www.theguardian.com

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