Japan intervenes to drag down yen, warns of more

Japan intervened in the currency markets on Wednesday to sell yen for the first time in six years and promised more to come in a bid to stop its relentless rise from threatening a fragile economic recovery.
Fresh after victory in a party leadership contest, Prime Minister Naoto Kan appeared to be stepping up efforts to wrench the country out of deflation by targeting yen strength, which has weighed on stock prices and corporate profits.
Kan told reporters that Wednesday's intervention had had some effect but the government was watching foreign exchange moves with a sense of urgency.
A senior government official would not rule out currency intervention in European hours and said Tokyo was ready to step into markets in New York hours if necessary.
Even as the dollar surged as much as 3% on the day against the yen, doubts about the ultimate effectiveness of Japan's unilateral yen selling spree abounded.
A 15-month solo effort by Switzerland to weaken its currency did little to tame the Swiss franc, and European Union officials waded in to say coordinated action always proves more effective.
Aside from apparently acting alone, Japan faces the stiff task of trying to put a halt to yen strength while other major central banks such as the Federal Reserve may be considering additional steps to ease policy that could weigh on their respective currencies.
"It is far less clear that intervention will be effective in a world of zero interest rates and excess liquidity, but we think that it still makes sense for Japan to take action to try to arrest yen strength," said Richard Jerram, chief Asia economist at Macquarie Securities in Tokyo.
The dollar was up 3.1% at 85.63 by 1230 GMT, on track for its biggest daily gain in nearly two years. It fell to a 15-year low beneath 83 yen overnight, which prompted Tokyo to act.
The EU offered some sympathy for Tokyo's plight, saying too rapid yen appreciation could threaten economic recovery. But a top official said coordinated action would have been better.
"Unilateral actions are not the appropriate way to deal with global imbalances," Jean-Claude Juncker, chair of the Eurogroup of euro zone finance ministers, said when asked about Japan's intervention.
Euro zone sources said earlier this month that there had been no discussions of European support for potential action by Japan, a clear signal that coordinated help would not have been forthcoming.
Analysts doubt other countries would help Japan soften the yen because they need weaker currencies to boost exports and growth. Intense pressure from Washington on China to let its currency strengthen also makes attempts by major economies to dampen their currencies particularly sensitive.
Estimates varied on how much Japan had spent in its first intervention in the foreign exchange market since 2003-2004, when it forked out 35 trln yen ($409 bln).
Traders cited market estimates that Wednesday's efforts amounted to around 1.5 trln yen ($17.67 bln).
Wednesday's action pleased Japanese exporters, many of whom had expected the yen to average 90 per dollar this fiscal year.
"We applaud the move by the government and the Bank of Japan to correct the yen's strength," Japan's No. 2 automaker Honda Motor Co. said in a statement.
Honda has pencilled in 87 yen per dollar in its estimates for the fiscal year to March 2011.
The Japanese currency's rise has brought it closer to its record peak of 79.75 per dollar set in 1995 and has weighed on the Tokyo stock market's Nikkei average, which climbed 2.3% on news of the intervention.