March 6, 2021

When Havens Fight Back

TOKYO — As global investors flee the dollar and euro for refuge in stronger currencies, those havens have started to send out a message: enough.

Demand for currencies like the Japanese yen and Swiss franc, seen as relatively safe assets to hold in turbulent times, have surged in recent weeks, driving up their value as investors have dumped dollars and euros as a result of debt worries in the United States and Europe.

A strong currency might sound like a validation of investor confidence in the performance of an economy. But for trade-dependent Japan and Switzerland, a sudden jump in the value of their currencies can wreak havoc by making their exports uncompetitive.

Declaring the yen’s rise to be a threat to the economy, Japan’s Ministry of Finance moved on Thursday to reverse the trend, intervening in the foreign exchange market and preparing to pump money into the country’s financial system. The maneuver came a day after the typically sedentary Swiss bank unexpectedly cut interest rates in an attempt to weaken the franc.

“The recent rise in the yen in currency markets has been one-sided and unbalanced,” Finance Minister Yoshiko Noda said on Thursday as he announced the start of the intervention. “If this trend were to continue, it would harm the Japanese economy, even as we do all we can to recover from our natural disasters.”

Japanese authorities delivered a one-two punch to markets. First, the Finance Ministry said it had begun selling yen and buying dollars. Then the Bank of Japan announced that it had further expanded its program to purchase government and corporate bonds, a form of monetary easing aimed at increasing liquidity and helping to dilute the value of the yen.

The yen weakened steadily throughout the day, from 77.15 yen to the dollar to about 80 yen on Thursday evening in Tokyo. Earlier this week, the yen came close to a record high of near 76.25 yen to the dollar.

“We judged that rises in the yen have economic costs, including the risk of damaging corporate sentiment and encouraging companies to shift production overseas,” the governor of the Bank of Japan, Masaaki Shirakawa, said at a press conference.

Japan, which had taken a laissez-faire approach to currency policy from about the middle of the last decade, has over the last year become more willing to intervene. Last Sept. 15, with concerns over the American economy mounting, it spent 2.1 trillion yen in its biggest one-day intervention ever.

On March 18, a week after an earthquake, tsunami and subsequent nuclear crisis, the Group of 7 industrialized economies came to Japan’s aid by staging a joint intervention, coordinating efforts to sell the Japanese yen on global currency markets. Traders had attributed the yen’s surge to Japanese companies repatriating funds to finance recovery back home.

But since then, the dollar has again slumped against the yen, falling 5 percent in the last month as investors wary of the debt impasse in the United States fled to other currencies. Even after lawmakers in Washington struck a deal on Tuesday to avert a default or downgrade of United States debt, fresh concerns over the economy again weighed on the dollar.

Japan did not disclose the size of its intervention on Thursday, but traders estimated that the government spent more than a trillion yen on the maneuver, according to Reuters. Asian central banks, Japanese retail investors and exporters bought into the dollar’s rally, helping to buoy the American currency, Reuters said.

The central bank followed with its announcement that it would seek to raise liquidity by increasing its asset purchase program, including Japanese government and corporate bonds, to 15 trillion yen from 10 trillion yen announced previously.

The bank said it would also expand its credit facility — its pool of funds available to buy up assets from banks and other businesses — to 35 trillion yen from 30 trillion yen. The bank also kept its benchmark interest rate near zero.

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