BOJ May Seek `Double Impact' When Selling Yen, BNP Paribas Says

By Shigeki Nozawa

Nov. 18 (Bloomberg) -- The Bank of Japan may seek the ``double impact'' of supporting exporters and increasing money supply by selling its own currency without absorbing funds after the intervention, BNP Paribas Securities Japan Ltd. said.

The yen rose 14 percent against the dollar the past three months, the world's best performer, as global financial turmoil prompted traders to unwind so-called carry trades, in which they get loans in low-cost countries such as Japan and seek higher returns elsewhere. The yen rose to 90.93 per dollar on Oct. 24, the highest level since August 1995.

``If the yen surges above 90 per dollar, the Japanese government won't hesitate to intervene'' on as large a scale as the last intervention from January 2003 to March 2004, said Ryutaro Kono, chief economist at BNP Paribas Securities in Tokyo.

The BOJ won't attempt to ``sterilize'' the yen it sells when intervening because the bank will then increase the money supply, aiding banks suffering from a lending freeze as well as holding back the yen, Kono said. Sterilized intervention involves the simultaneous purchase of securities in the open market for the same amount of local currency sold to avoid expanding the money supply.

Policy makers are better placed to sell yen without mopping up local excesses after the BOJ's decision to start paying 0.1 percent interest on reserves this week. The payments will stop the overnight lending rate falling below 0.1 percent even if the money supply is increased by yen sales from the central bank. The BOJ introduced the interest payments to encourage financial companies to lend excess cash to the central bank.

The BOJ didn't sterilize its yen sales in 2003 and 2004, when the bank unloaded about 35 trillion yen to stem the currency's advance, analysts said.

Policy makers also kept the benchmark interest rate close to zero at that time and focused on providing banks with plentiful reserves to encourage lending, seeking to fight deflation.

``After yen-selling intervention, the government will increase money supply through unsterilization,'' said Eiji Dohke, chief strategist at UBS Securities Japan Ltd. in Tokyo.

To contact the reporter on this story: Shigeki Nozawa in Tokyo at snozawa@bloomberg.net