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Haruhiko Kuroda Nominated to Lead Japan’s Central Bank

February 28, 2013 by Leave a Comment

TOKYO (AP) — The Japanese government on Thursday nominated Haruhiko Kuroda, the president of the Asian Development Bank, to head Japan’s central bank, counting on his support for more aggressive monetary policy to help the world’s third-biggest economy escape recession and deflation.

The current Bank of Japan governor, Masaaki Shirakawa, will step down on March 19, three weeks before his term was due to end. Prime Minister Shinzo Abe favored Mr. Kuroda for the post; a vote by Parliament on the choice is due next month.

The nomination of Mr. Kuroda, 68, was widely expected. The Oxford-educated former vice minister of finance has criticized central bank policies in the past and backs Abe’s strategy for reviving Japan’s economy by fighting deflation through monetary easing and hefty government spending.

Also as expected, the government proposed that Kikuo Iwata, a professor at Gakushuin University in Tokyo, and Hiroshi Nakaso, an executive director at the Bank of Japan, to become the bank’s top two deputy governors.

Mr. Kuroda is viewed as part of the global “currency mafia” in Japan. During his years as Japan’s top financial diplomat, he often decried the Japanese yen’s rise against the dollar, saying it did not reflect the fundamentals of the economy.

Despite frequent central bank interventions in the currency markets, the yen continued its long-term ascent thanks to its status as a safe haven and low interest rates that encouraged an international “carry trade” of borrowing yen and investing the money in the bonds of countries with higher interest rates.

Mr. Abe’s support for a weaker yen, to help support Japanese export manufacturers, has lifted share prices and spurred a decline in the value of the Japanese currency, which has weakened by about 20 percent against the dollar since last fall.

Article source: http://www.nytimes.com/2013/02/28/business/global/haruhiko-kuroda-nominated-to-lead-japans-central-bank.html?partner=rss&emc=rss

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U.S. Signals Support for Japan’s Yen Policy

February 15, 2013 by Leave a Comment

MOSCOW — Ben S. Bernanke, the Federal Reserve chairman, strongly indicated on Friday that the United States did not intend to censure Japan for weakening its currency over the last several months, something that has aided Japanese exporters and angered its competitors.

Mr. Bernanke spoke in brief introductory remarks at a conference in Moscow of the Group of 20, a club of the world’s largest industrial and emerging economies.

At issue are stimulus programs backed by Prime Minister Shinzo Abe, who is also maintaining pressure on the Bank of Japan to keep interest rates near zero and flood the economy with money to support Japanese manufacturers. As a result, the yen has lost about 15 percent of its value against the dollar over the last three months, meaning products produced in Japan, like some Sony electronics or models of Toyota cars, are relatively cheaper.

Japan’s maneuver touched off fears that other countries and the European Union might follow suit in a so-called currency war, which has been the main topic of the Group of 20 meeting here, which runs through Saturday.

Initially, it seemed the world’s largest economies might agree on a firm statement at the end of the meeting to condemn a currency war, or competitive devaluations. This tactic is now widely seen as a beggar-thy-neighbor approach to creating growth that would ultimately harm a global recovery and is understood to be a cause of the lingering nature of the depression in the 1930s.

Mr. Bernanke, an advocate of the loose monetary policy in the United States known as quantitative easing, but also a student of the Great Depression, suggested a distinction should be drawn based on the intention of the monetary easing.

“The United States is using domestic policies to advance domestic agendas,” Mr. Bernanke said, speaking in a gilded and colonnaded chamber in the Kremlin to a round table of the world’s leading central bankers and finance ministers, in addition to President Vladimir V. Putin of Russia.

“We believe that by strengthening the U.S. economy, we are helping to strengthen the global economy as well,” Mr. Bernanke said. “We welcome similar approaches by other countries.” He said he endorsed an earlier statement at the meeting from Christine Lagarde, the director of the International Monetary Fund, who had said the risk of a currency war was “overblown.”

The global recovery has become unbalanced, Mr. Lagarde said in her statement to the group. Developed countries are swooning, while the emerging markets bounced back quickly, and yet such countries, including Russia, have been critical of the stimulus efforts of the developed nations. Japan’s devaluation of the yen is “sound policy,” she said.

“The international monetary system can function effectively if each country follows the right policies for their domestic economies,” she said, ultimately lifting the tide of the global marketplace, she said.

Ms. Lagarde did caution that too bald a ploy to prop up exports would not count as a justified weakening of a currency.

Because loose monetary policy encourages economic growth while also helping exports, critics of such tactics say these are distinctions without a difference.

Germany’s finance minister offered a contrarian view, saying that countries should not use easy money to avoid reducing their deficits over the long term, with measures like reducing government waste.

The Russian finance minister, Anton Siluanov, the host of the meeting, has also been pushing for a strong statement against competitive devaluations in the final communiqué from the forum, expected Saturday. Mr. Siluanov said in his opening remarks that a statement endorsing market mechanisms to set exchange rates would “find a place in the communiqué.”

That reiterated the position of a statement issued by the Group of 7 earlier this week. But it now seems a watered-down version is more likely.

Article source: http://www.nytimes.com/2013/02/16/business/global/g20-forum-moscow.html?partner=rss&emc=rss

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Japan’s Nikkei Average Surges

February 6, 2013 by Leave a Comment

TOKYO — Japan’s Nikkei average surged 3.8 percent Wednesday, closing at its highest point since October 2008, after the yen fell sharply amid expectations of a more aggressive economic policy.

The benchmark rose 416.83 points to 11,463.75, its biggest one-day gain since March 2011, as the Japanese currency dropped to 94.08 against the dollar.

On Tuesday, Masaaki Shirakawa, the governor of the Bank of Japan, said he would step down, along with his two deputies, in March, three weeks before the scheduled end of his five-year term.

Prime Minister Shinzo Abe has put the central bank under relentless pressure to do more to pull the economy out of the doldrums. Mr. Shirakawa’s announcement opened the way for him to quickly appoint a governor who would be bolder in loosening monetary policy.

“There was a very aggressive, solid weakening of the yen in response to what seems like relatively trivial news,” said Stefan Worrall, director of equity sales at Credit Suisse in Tokyo. “But it’s nonetheless news that signals the expectation and recognition that the momentum in Japan is continuing to favor yen weakening,”

Although investors have seen the weak yen as a boon for exporters over the last two and a half months, Mr. Worrall said, there are other benefits to a more competitive exchange rate.

“On a U.S. dollar basis, Japan has yet to break out, particularly if you compare its rally with rallies” in Germany and Australia, he said.

Indeed, brighter profit forecasts from the likes of Toyota Motor and Mitsubishi Heavy Industries helped sustain the optimistic mood Wednesday. Their gains stemmed from the weaker yen, which inflates the value of earnings from overseas.

Toyota climbed 6.1 percent and was the most-traded stock by turnover on the main board, and Mitsubishi Heavy rose 10.4 percent, with both stocks hitting their highest levels since autumn 2008.

Expectations of a new central bank governor also helped inflation-sensitive shares, as the central bank signed onto a new 2 percent inflation target last month with the government. On Wednesday, the real estate sector advanced 4 percent.

Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley, said the central bank might start “open-ended” asset buying in April, well before the 2014 start the central bank committed to at its last policy meeting.

Mr. Fujito said he saw Kazumasa Iwata, a former Bank of Japan deputy governor and a vocal supporter of an asset purchase fund of ¥50 trillion, or $530 billion, as the most likely candidate to succeed Mr. Shirakawa.

Others seen as possible candidates are Haruhiko Kuroda, president of the Asian Development Bank, and Heizo Takenaka, who a decade ago was an economics minister.

Article source: http://www.nytimes.com/2013/02/07/business/global/japans-nikkei-average-surges.html?partner=rss&emc=rss

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Japan’s Central Bank Governor Offers to Depart Early

February 6, 2013 by Leave a Comment

Prime Minister Shinzo Abe is expected to replace Mr. Shirakawa, who has long preached caution on monetary policy, with a successor who is more open to printing money, stoking inflation and bringing an end to the falling prices that have weighed on Japan.

During his five-year term, Mr. Shirakawa resisted calls from successive governments to be more aggressive, warning that loose money would only lead to unchecked government spending and runaway inflation. Mr. Shirakawa also argued that the government, not the Bank of Japan, needed to do more to encourage economic growth through structural reforms and other growth policies.

Since late last year, Mr. Abe has taken the bank to task, singling out its tepid monetary policies as the root of Japan’s economic woes. He successfully campaigned on a bolder monetary agenda ahead of nationwide elections in December, arguing that the central bank needed to set an inflation target of 2 to 3 percent. The strategy resulted in a decisive victory for his Liberal Democratic Party.

Markets cheered Mr. Abe’s monetary drive. The Nikkei 225-share index has surged almost 30 percent since mid-November, and the yen has weakened by 15 percent, an advantage for Japanese exporters.

Mr. Shirakawa has found it increasingly difficult to hold his ground. In January, the bank agreed to issue a rare joint statement with the government that laid out a target for 2 percent inflation. It also agreed to pursue unlimited monetary easing through an asset purchase program until that target was met. Japan has been enduring deflation, or falling prices, since the late 1990s.

But some economists have said that Mr. Shirakawa’s policies remained too timid and that unless the Bank of Japan were even more aggressive, 2 percent inflation would prove to be an elusive target. The bank needed to expand its asset purchase program, now at about 101 trillion yen, or about $1.01 trillion, by a much bigger amount, the economists have said, and needed to step up its purchases of a wider range of assets including longer-term government bonds.

“After three five-year terms of dyed-in-the-wool conservatives, the Bank of Japan is finally likely to have a governor who is prepared to use the monetary armory at his disposal,” Nicholas Smith, Japan strategist at CLSA Asia-Pacific Markets, said in a note.

Even using tougher language than the soft-spoken Mr. Shirakawa would help, Mr. Smith said. “The more you do with threatening rhetoric, the less you have to do with real money,” he said.

Speaking to reporters Tuesday, Mr. Shirakawa explained that he had offered to step down early to time his departure from the bank with those of his two deputies, whose terms end March 19.

“I told the prime minister that I will resign on March 19 so that a structure with a new governor and two deputy governors can start simultaneously,” Mr. Shirakawa said after a meeting of the government’s top economic council. He said that Mr. Abe, who led the council meeting, had “listened carefully,” but it was unclear late Tuesday whether the prime minister would agree to an early departure.

Names circulated in the Japanese news media as possible candidates to succeed Mr. Shirakawa include the former economy minister Heizo Takenaka; the former Bank of Japan deputy governors Kazumasa Iwata and Toshiro Muto; the Asian Development Bank president, Haruhiko Kuroda; and the University of Tokyo economist Takatoshi Ito.

Article source: http://www.nytimes.com/2013/02/06/business/global/japanese-central-bank-chief-to-step-down-early.html?partner=rss&emc=rss

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Bank of Japan Expands Efforts to Prop Up Nation’s Economy

January 21, 2013 by Leave a Comment

TOKYO (AP) — Bowing to government pressure, Japan’s central bank on Tuesday pledged more aggressive action to lift the economy, including setting a 2 percent inflation target.

The Bank of Japan said it would conduct “open-ended” asset purchases to help achieve the goal of breaking out of a long spell of deflation.

Prime Minister Shinzo Abe had urged the central bank to ease monetary policy further to prop up the economy.

Whether the effort will succeed remains to be seen: the central bank has not achieved even its 1 percent inflation target, with price increases hovering below 0.5 percent for the past two years despite surges in energy costs.

The central bank described its inflation goal as a “price stability target.” It said: “Under the price stability target, the bank will pursue monetary easing and aim to achieve this target at the earliest possible time.”

But it said it would also “ascertain whether there is any significant risk to the sustainability of economic growth, including from the accumulation of financial imbalances.”

Among the risks are a ballooning public debt, already well over twice the size of Japan’s gross domestic product.

Mr. Abe’s government is seeking to spur growth both through heavy spending on public works and other projects and through monetary easing. The central bank’s announcement on Tuesday was in line with expectations.

The government was determined that the central bank set a 2 percent inflation target, the trade minister, Toshimitsu Motegi, told reporters on Monday. “We want a clear inflation target to aim for,” Mr. Motegi said. “Other countries have inflation targets, and it’s not just 1 percent. They are all at least 2 percent,” he said.

He said the monetary easing, which has involved tens of trillions of yen (hundreds of billions of dollars) in asset purchases and years of near-zero interest rates, so far had been “inadequate.”

The Abe government is expected to nominate as Bank of Japan governor an expert known to favor its policies when the term of the current governor, Masaaki Shirakawa, ends this spring.

However, Mr. Motegi rejected accusations that the government’s demands were meant to erode the central bank’s independent status.

“We are not doing this to gang up and pick on Mr. Shirakawa,” he said. But he added that “the policy of aiming to escape deflation will not change, not today, not tomorrow or the day after tomorrow.”

Article source: http://www.nytimes.com/2013/01/22/business/bank-of-japan-expands-efforts-to-prop-up-nations-economy.html?partner=rss&emc=rss

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Japan Leader Keeps Up Pressure on Central Bank to Stimulate Economy

December 25, 2012 by Leave a Comment

TOKYO — The incoming Japanese prime minister, Shinzo Abe, kept up his calls on Tuesday for the Bank of Japan to drastically ease monetary policy by setting an inflation target of 2 percent, and he repeated that he wants to tame the strong yen to help revive the economy.

Mr. Abe, who will be sworn in on Wednesday and is expected to appoint his cabinet on the same day, is prescribing a mix of aggressive monetary policy easing and big fiscal spending to beat deflation and rein in the strong yen.

“The economy, diplomacy, education and rebuilding in the northeast,” which was hit by the 2011 tsunami, quake and nuclear disaster, “are in a critical situation. I want to create a cabinet which can overcome this crisis,” Mr. Abe told a news conference.

“We have advocated beating deflation, correcting the strong yen and achieving economic growth during the election, so we must restore a strong economy,” he said, adding that the stagnant economy was also undermining Japan’s diplomatic clout.

Mr. Abe, who quit abruptly as prime minister in 2007 after a troubled year in office, repeated that his new government hoped to sign an accord with the Bank of Japan to aim for 2 percent inflation, double the central bank’s current target.

“Once I become prime minister, I will leave it up to the BOJ to decide on specific measures on monetary policy,” Mr. Abe told a meeting with officials from the Keidanren, the major business lobbying group in Japan.

“I hope the BOJ pursues unconventional measures, including bold monetary easing,” he added.

His remarks were taken as maintaining pressure on the central bank to expand monetary stimulus more forcefully in order to tackle the deflation that has dogged Japan for more than a decade.

Mr. Abe’s opposition Liberal Democratic Party won by a landslide in this month’s lower-house election just three years after suffering a crushing defeat.

The party has threatened to revise a law guaranteeing the Bank of Japan’s independence unless the central bank sets a 2 percent inflation target. The B.O.J., which eased monetary policy in December, has promised to debate setting a new price target at its next policy-setting meeting on January 21-22.

Mr. Abe and his coalition partner, Natsuo Yamaguchi, the head of the small New Komeito party, agreed on Tuesday to set the inflation target and compile a big stimulus budget, Mr. Yamaguchi told reporters after the two met.

Mr. Abe is expected to draft an extra budget by mid-January.

Article source: http://www.nytimes.com/2012/12/26/business/global/japan-leader-keeps-up-pressure-on-central-bank-to-stimulate-economy.html?partner=rss&emc=rss

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Asia Stocks Lower on Concern About U.S., Europe

December 27, 2011 by Leave a Comment

BEIJING (AP) — Global stock markets were mixed Tuesday amid worries about weak Christmas sales in the United States and Europe and a warning by Japan’s central bank about possible risks from the European debt crisis.

Tokyo lost 0.5 percent to 8,440.56 while China’s benchmark Shanghai index dropped nearly 1.1 percent to 2,166.21. Seoul, Taipei, Singapore and Jakarta declined. Hong Kong and Sydney were closed.

In Europe, France’s CAC 40 opened up 0.3 percent at 3,111.37 while Germany’s DAX also gained 0.3 percent to 5,897.57.

Pessimistic Asian investors expect upcoming indicators including Chinese manufacturing and Christmas retail sales in key Western markets to be lackluster, said Peng Yunliang, a market strategist for Shanghai Securities.

“The markets expect these data will be no good,” Peng said. “Some people think sales data from Christmas in the United States and Europe will not be as good as last year.”

China’s government reported Tuesday that profit growth slowed at its major industrial companies. Total profit in the January-November period rose 24.4 percent over a year earlier, down 0.9 percent from the growth rate for the first 10 months of the year.

Tokyo’s Nikkei 225 declined after the Bank of Japan released notes that showed a Finance Ministry representative warning at a November meeting the world’s third-largest economy faces “significant downside risks” due to Europe’s debt problems.

Wall Street and European stock markets were closed Monday because Christmas fell on a Sunday this year.

Elsewhere in Asia, Seoul’s Kospi shed 0.8 percent to 1,842.02 while Taiwan’s Taiex lost 0.1 percent to 7,085.03. Singapore’s benchmark was off 0.1 percent at 2,673.18. Bangkok and Kuala Lumpur also declined.

Chinese losses were led by media, information technology, food and travel-related companies.

Dairy shares fell after China’s biggest milk producer said Monday it destroyed a batch found to be contaminated with a potentially cancer-causing toxin. Zhejiang Beingmate Scientific Industrial Trade Co., an infant formula producer, lost 6.8 percent while Bright Dairy Food Co. shed 4.1 percent.

Asian investors are closely watching Europe, whose debt crisis already has hurt demand for exports from China and other major producers.

In the last pre-holiday U.S. trading day on Friday, the Dow Jones industrial average added 1 percent while the Nasdaq composite index gained 0.7 percent. The Standard Poor’s 500 index rose 0.9 percent.

Benchmark crude for February delivery was down 14 cents at $99.54 a barrel in electronic trading on the New York Mercantile Exchange.

In currencies, the euro was up 0.1 percent at $1.3065 while the dollar held steady at 77.91 yen.

Article source: http://www.nytimes.com/aponline/2011/12/26/business/AP-World-Markets.html?partner=rss&emc=rss

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Stocks Surge on Action by Central Banks

November 30, 2011 by Leave a Comment

Stocks in the United States surged nearly 4 percent on Wednesday, with the Dow Jones industrial average up more than 400 points, after central banks took action to address growing concern about the debt crisis in the euro zone.

The Federal Reserve, the Bank of England, the European Central Bank, the Bank of Japan, the Bank of Canada and the Swiss National Bank all moved to bolster financial markets by increasing the availability of dollars outside the United States.

The jump in stocks was an extension of the turmoil and volatility that have weighed on global markets concerned about sovereign debt pressures in Europe for more than a year.

Yet analysts noted that sharp gains have often failed to stick. Even with Wednesday’s jolt, the Standard Poor’s 500-stock index was down 1.4 percent for November so far and down more than 1.6 percent for the year to date. In afternoon trading, the Dow was up more than 419 points, or more than 3.6 percent. The S.P. 500 and the Nasdaq composite index each rose more than 3.5 percent.

“The markets are breathing a sigh of relief,” said Stanley A. Nabi, chief strategist for the Silvercrest Asset Management Group.

But the coordinated action also signaled that the problem had reached a crisis point, he said, and that the central banks recognized there was a “lot of danger” in letting the current situation continue.

Still, he questioned the lasting effects of the action if not followed up with steps to address the roots of the sovereign debt problems in countries like Greece and Italy. The yield on the 10-year Treasury note, which moves in the opposite direction of its price, rose 6 basis points, to 2.054 percent, from 1.99 percent late on Tuesday.

Ralph A. Fogel, head of investment strategy for Fogel Neale Wealth Management, said rates would probably remain very low in the bond markets.

But in equities, Mr. Fogel added, the “fear is off that there is going to be any sort of tremendous move down like there was in 2008.”

Investors and traders were also treated to a swath of economic news on Wednesday in two of the most sensitive sectors, housing and jobs. Statistics from the payroll processing company ADP showed that the economy added 206,000 jobs in November, more than consensus forecasts, while pending home sales rose 10.4 percent in October from the previous month.

Still, the economic news was considered a sideshow in the markets.

“It is all about the central banks,” Mr. Fogel said.

Steven Ricchiuto, chief economist for Mizuho Securities USA, said the economic reports provided a fresh example of how data could be inconsistent as the economy bounces along a shallow growth path.

“The apparently decisive turn in the data follows an equally decisive turn to the downside this past summer, which proved to be only temporary,” he wrote an e-mailed commentary, “and I can see no fundamental reason why the current upside breakout will be any different. Instead, I see this upturn as just one more in a series of false starts.”

The Euro Stoxx 50 closed up at 4.3 percent, and the CAC 40 in Paris ended up 4.2 percent, while the DAX index in Germany was up almost 5 percent. The FTSE 100 in London rose 3.16 percent.

On Wall Street, shares of banks, energy companies and materials providers all powered ahead by more than 4 percent.

Bank of America shares, which on Tuesday fell more than 3 percent, to $5.08, their lowest closing level since March 2009, were up more than 3 percent, at $5.24, on Wednesday.

Financial shares have come under particular pressure as the euro crisis has dragged on, and after the market closed on Tuesday, the Standard Poor’s ratings agency reduced its outlook on several big banks, including JPMorgan Chase and Bank of America.

The dollar fell against an index of major currencies. The euro rose to $1.3460 from $1.3317.

Binyamin Appelbaum contributed reporting from Washington.

Article source: http://feeds.nytimes.com/click.phdo?i=858859a4973570e501d1915b2ffa6099

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Japan’s Central Bank Sounds Warning on Global Economy

October 7, 2011 by Leave a Comment

TOKYO — The Japanese central bank sounded the alarm over the risks facing the world economy, even as it left its monetary policy unchanged Friday, underscoring the gravity of a global economic slowdown over which policy makers may have little control.

Also Friday, the Japanese cabinet outlined a supplemental budget of ¥12 trillion, or $155 billion, for the reconstruction of areas affected by the natural and nuclear disasters this year, the third such budget, and approved a plan to raise taxes temporarily to fund the effort.

The latest emergency budget follows about ¥6 trillion already earmarked in two supplemental budgets this year. It includes money to help relocate survivors and create a fund to revitalize the economy of Fukushima Prefecture, which has been hit hard by the nuclear crisis.

The government will raise up to ¥11.2 trillion from temporary taxes to help cover costs of rebuilding, according to the provisional tax plan. Officials have said they would also cut unnecessary government expenditures and sell state-owned assets, possibly including the government’s entire stake in Japan Tobacco.

The government has yet to work out the details of any extra spending, as well as tax increases, and must also win the approval of a divided Parliament. It aims to submit the budget to Parliament later this month, according to Kyodo News.

“The uncertain outlook for the global economy and instability in financial markets are underscoring the downside risks for Japan’s economy,” said Masaaki Shirakawa, the Bank of Japan governor.

The world’s advanced economies, in particular, are on the brink of a major slowdown, threatening the Japanese economy, he warned. The European debt crisis has started to cause real damage to the economies in Europe and beyond, he said.

“European financial markets remain tense, as there have been moves in money markets similar to those seen during the Lehman crisis,” he said, referring to the collapse of Lehman Brothers in September 2008. “What’s different is that the credibility of government debt has become the target of market worries, and this has resulted in bigger impact.”

The global economic problems have affected the Japanese economy just as it has shown signs of recovery following the hugely disruptive earthquake and tsunami in March, and the subsequent nuclear crisis. Economists say they expect figures to show that Japan emerged from recession in the third quarter, as companies restored supply chains disrupted by the disasters.

The International Monetary Fund forecasts that the Japanese economy will grow 2.3 percent in 2012, the fastest among advanced economies, thanks to Japan’s large fiscal outlays for reconstruction, in contrast with fiscal austerity measures imposed elsewhere in the world.

But prospects for a strong rebound of the country’s exports — on which Japan ultimately depends for economic growth — are looking increasingly frail.

Particularly worrying has been the strong yen, which has surged as investors look for a haven in which to park their assets. The strength of the yen has hurt Japan by making its exports less competitive and eroding exporters’ overseas profits.

Still, the central bank, with interest rates already near zero and a reluctance to flood the economy with more money, has little left in its policy arsenal to bolster the Japanese economy.

Its kept its key interest rate untouched at a range of zero to 0.1 percent and maintained the size of its asset-buying program.

It extended by only six months a ¥1 trillion emergency loan program for regions hit by the March disasters. Half that amount remains untapped amid a still-tepid economic recovery in disaster-affected areas.

The bank’s decision came after the European Central Bank also kept interest rates steady, though it threw a lifeline to struggling banks to ward off a credit crunch. Also Thursday, the Bank of England announced a second round of monetary easing.

Article source: http://feeds.nytimes.com/click.phdo?i=a1f21636c2f0a38e52e243f808e676e9

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Swiss Central Bank Acts to Halt Franc’s Rise

September 6, 2011 by Leave a Comment

The Swiss currency, long considered a safe haven, has surged against the euro and the dollar this year as investors flee turmoil in the markets. That has raised fears among Swiss businesses that the country’s exporters will be priced out of major markets. Switzerland’s biggest trading partner is the European Union.

“The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development,” the Swiss National Bank said in a statement
. It said it “is therefore aiming for a substantial and sustained weakening of the Swiss franc.”

The central bank “will no longer tolerate” a euro-franc rate below a floor of 1.20 francs, it said, and “will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.”

The franc fell sharply, with the euro rallying to 1.20 Swiss francs from 1.11 francs late Monday. The dollar soared to 0.8483 Swiss franc from 0.7872 franc.

The euro has traded as low as 1.03 francs this summer.

The central bank’s new target commits it to buying euros and selling francs any time the euro falls below 1.20 francs. That amounts to the setting of a “floor” for the euro.

The authorities had also considered implementing a currency “peg,” in which the franc would be defended at a specific rate. In reality, considering the downward pressure on the euro, the 1.2 franc level will probably prove a de facto peg for the time being.

Currency market intervention, when it is not coordinated among the major central banks, has failed to have a lasting effect in recent years, as the Bank of Japan has learned to its chagrin.

Steven Saywell, head of global currency strategy at BNP Paribas in London, said he thought it “very unlikely” that the Swiss National Bank’s counterparts at the Federal Reserve and European Central Bank would be eager to follow suit, even though a Friday-Saturday meeting of Group of 7 finance and central bank officials in Marseilles would give them an opportunity to coordinate policy.

“The G-7 has far greater issues to deal with,” Mr. Saywell said, “like preventing the U.S. economy from sliding into recession and supporting the ongoing political discussions about addressing Europe’s debt problems.”

Indeed, the E.C.B. appeared to distance itself from the S.N.B. decision, saying in a two-sentence statement that the Swiss central bank had made the decision to hold down the value of the franc “under its own responsibility.”

Mr. Saywell said investors were certain to test Switzerland’s resolve, as the authorities there were attempting to buck a strong tide.

“In an environment of strong growth and economic stability, the franc might weaken,” he said. “But in this climate, we expect the market to challenge the S.N.B. over the next few days.”

The move is but the latest by the central bank in seeking to check the rise in the franc. Last month, it said that it would significantly increase the supply of liquidity to the Swiss franc money market. It increased banks’ sight deposits, a liquidity facility through which banks can withdraw money, to 120 billion francs from 80 billion francs. It also said it would conduct foreign exchange swap transactions to create liquidity in Swiss francs.

Even at a rate of 1.20 francs per euro, the central bank said Tuesday, “the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the S.N.B. will take further measures.”

The central bank’s action “is a bold move, but that level is still relatively high, implying that the economy will suffer nonetheless,” Jennifer McKeown, an economist with Capital Economics in London, wrote in a research note. “It sounds like, rather than using foreign exchange swaps to flood the market with francs as it has in the recent past, the bank plans to revert to its earlier strategy of intervening directly in currency markets.”

Ms. McKeown noted that the euro had averaged about closer to 1.7 francs over the long run, so “we suspect that Swiss exports will drop anyway, given the still relatively high level of the franc.”

Article source: http://feeds.nytimes.com/click.phdo?i=5bd8fa129636d4b06914e97b2243f7ce

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