By Mayumi Otsuma and Simon Kennedy
Oct. 5 (Bloomberg) -- Japanese Finance Minister Hirohisa Fujii issued his clearest warning yet that his nation is open to intervening in the currency market even as the Group of Seven declined to criticize the tumbling dollar.
“If currencies show some excessive moves in a biased direction, we will take action,” Fujii said Oct. 3 in Istanbul after a meeting of G-7 finance ministers and central bankers. He declined to say if the yen is now trading in such a way.
Fujii’s position has shifted since his initial remarks on taking office last month, when he opposed seeking a “weak” yen and selling the currency which last week rose to an eight- month high of 88.24 against the dollar. The gain is threatening the profits of exporters from Canon Inc. to Toyota Motor Corp.
The yen pared earlier gains against the dollar as Fujii’s language raised the risk of the first currency-market action by a G-7 nation since 2004. The change in his stance reflects a slide in the U.S. currency that has sparked concern from Canada to France over the potential impact on economic recoveries.
Fujii’s remarks went further than the G-7 did in a statement that stopped short of issuing a specific call for a stronger dollar.
“Japan is thinking more about the currency’s effect on the real economy, and if necessary they’ll intervene,” Gerard Lyons, the London-based chief economist of Standard Chartered Bank, said in Istanbul. “For now they seem to want to talk it down, but eventually they’ll have to do something about it.”
Yen Pares Gains
The yen traded at 89.75 per dollar at 11:28 a.m. in Tokyo, little changed from 89.81 late Oct. 2 in New York, after earlier climbing as high as 89.23. The dollar fell to $1.4640 per euro from $1.4576.
Fujii, 77, said last month he opposed stepping into the foreign-exchange market in principle, before revising that comment to say he wasn’t an advocate of a strong currency and that Japan was open to acting should the market move “abnormally.” Fujii said in Istanbul that his early comments about the yen “have been a bit misunderstood,” and that currencies should be set by markets.
Fujii is confusing traders and likely still wants the yen to gain as the ruling Democratic Party of Japan, which won power in August, tries to refocus the economy toward domestic demand and away from exports, said Stephen Jen, a managing director at BlueGold Capital Management LLP in London.
Maintain Stance
“I doubt Finance Minister Fujii will materially change his stance until Japan is pushed deep into recession,” Jen said.
Japan hasn’t entered the foreign exchange market since the central bank, at the request of the Finance Ministry, sold a record 14.8 trillion yen ($164 billion) in the first quarter of 2004 to restrain the currency. In his first tenure as finance chief, from August 1993 until June 1994, Fujii oversaw more than 1.3 trillion yen ($15 billion) of yen sales. The G-7 hasn’t intervened as a group since September 2000.
The yen’s appreciation threatens to undermine Japan’s export-driven economic recovery as the jobless rate hovers near a record high and deflation continues. Tokyo-based Canon, the country’s biggest maker of office equipment, estimates every 1 yen appreciation against the dollar will lower its second-half operating profit by 4.2 billion yen.
The “current level around 90 yen is a bit painful,” Yukitoshi Funo, executive vice president of Toyota City-based Toyota, the world’s largest seller of hybrid autos, said on Sept. 25. “I think the yen should be a little weaker.”
Different Tone
Fujii struck a different tone than his G-7 colleagues, who repeated that “excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.”
That means further declines in the dollar are likely, said Sophia Drossos, co-head for global foreign exchange strategy at Morgan Stanley in New York. In April 2008, the G-7 spoke out against a declining dollar by complaining about “sharp fluctuations in major currencies.”
“If the G-7 wanted to push back more forcefully, they could have,” said Drossos, a former manager of the Federal Reserve’s foreign-exchange portfolio. “Since they didn’t, they may be tolerant of recent moves or they may recognize their limitations in slowing recent trends.”
The dollar may also be undermined as governments and central bankers seek to tackle so-called imbalances such as the U.S. trade deficit and China’s current-account surplus, said Marco Annunziata, chief economist at UniCredit Group in London.
Circle to Square
“This inevitably validates dollar weakness” he said. “This was an impossible circle for the G-7 to square.”
Still, French Finance Minister Christine Lagarde said after the meeting that there is a need for a “strong dollar.” U.S. Treasury Secretary Timothy Geithner told reporters that “it is very important to the United States that we continue to have a strong dollar.”
The G-7 kept pressure on China to allow greater flexibility in the yuan in the interest of smoothing out lopsided flows of trade and investment. While the dollar has dropped 14 percent against a basket of seven currencies since early March, it has gained 0.3 percent against the yuan, which is managed by Chinese authorities.
That is handing Chinese exporters an advantage in overseas markets and forcing other nations to shoulder the burden of the dollar’s dive.
Set By Market
“We all need to have our currencies fluctuate” if their relative values are to be set by the market, Canadian Finance Minister Jim Flaherty said in an interview yesterday. He added: “There’s clearly upward pressure on the Canadian dollar.”
Lagarde said she was “struck” by Chinese pledges to bolster domestic demand. It was “very precise language” that, if followed, will help “address global imbalances” and “have consequences on exchange rates,” she said.
G-7 officials said the global economic recovery is “fragile” and promised to maintain stimulus programs until growth takes hold. They met in Turkey before this week’s annual meetings of the International Monetary and World Bank and a week after the G-20 leaders named that forum as the primary arena for international economic policy-making.
The transfer of power toward the G-20, which includes emerging markets such as China and Brazil, prompted the G-7 finance officials to say they would tighten the schedule of their meetings, work more in parallel with G-20 events and issue statements only on merit. G-20 finance chiefs will meet next month in Scotland.
“We agreed that we want to work more informally again in the future, taking a step back to what it used to be like in the past,” said German Deputy Finance Minister Joerg Asmussen.
To contact the reporters on this story: Mayumi Otsuma in Istanbul at motsuma@bloomberg.netSimon Kennedy in Istanbul at skennedy4@bloomberg.net
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