Japan unveiled a $100 billion effort to help companies cope with a surging yen, signaling that officials may be resigned to the currency remaining high.
The government will release foreign-exchange reserves to the state-run Japan Bank for International Cooperation for funding to aid exporters and spur purchases overseas, Finance Minister Yoshihiko Noda told reporters in Tokyo today. The announcement came hours after Moody’s Investors Service lowered the nation’s debt rating one step to Aa3, with a stable outlook.
The yen was trading today at a level stronger than before officials last intervened to weaken the currency on Aug. 4. Its rise since the March 11 earthquake to post-World War II highs is undermining the nation’s recovery after three straight quarters of economic contraction, complicating the government’s efforts to tackle its debt burden.
“The government’s message may be that businesses need to come up with their own ways to deal with the strengthening currency, that they shouldn’t hold their breath for intervention,” said Toshiya Yamauchi, a senior currency analyst in Tokyo at Ueda Harlow Ltd. “But the reality is that the demerits of a strong yen far outweigh the merits.”
The ministry will bolster monitoring of the currency market, requiring major financial institutions to disclose trading positions through Sept. 30, Noda said. About 30 organizations will be subject to the procedures, a ministry official told reporters in Tokyo on condition of anonymity. The yen’s appreciation is bad for the economy and may exacerbate the nation’s fiscal woes, Thomas Byrne, a vice president at Moody’s, said at a press conference in Tokyo today. He said it was unlikely his company would take negative action on the credit rating over the next 18 months.
Japan has amassed $1.07 trillion in foreign-exchange reserves, the world’s largest after China. The yen traded at 76.55 per dollar at 4:12 p.m. in Tokyo today. It touched a postwar high of 75.95 on Aug. 19 in New York and has been the second-best performer of ten major currencies tracked by Bloomberg over the past month.
“It does seem as though they’re trying everything but intervention now,” Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney, told Bloomberg Television. The case for “big scale intervention in the near term” isn’t as compelling as it was for Switzerland when that nation moved to weaken the franc, because Japan’s currency is proving less volatile, he said.
The Bank of Japan applauded the Finance Ministry’s announcement, saying in a statement that the measures would “contribute to the stability” of currency markets. The one-year funding program through JBIC is intended to encourage “the private sector to exchange yen-denominated funds to foreign currencies by supporting exports by small and mid-sized companies, securing energy resources and helping Japanese companies to purchase foreign businesses,” Noda said.
The downgrade in Japan’s credit grade was the first by Moody’s since 2002 and reflects deteriorating credit quality across developed nations from Italy to the U.S., which lost its AAA status at Standard & Poor’s this month. While the move adds to the challenges of the next Japanese prime minister, scheduled to be picked next week, the impact on bond yields may be limited by what Moody’s described as domestic investors’ preference for government debt.
Bank units of Mitsubishi UFJ Financial Group Inc. (8306), Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. (8411) were among lenders that had their ratings lowered one step by Moody’s after the cut to the government’s grade.
The cost of insuring corporate and sovereign bonds in Japan against default increased, according to traders of credit-default swaps. The Markit iTraxx Japan index rose 7 basis points to 153 basis points as of 12:09 p.m. in Tokyo, on course for its highest level since June 10, 2010, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
Today’s rating move brings Japan to the same level as China, showing the diverging paths of Asia’s two biggest economies. China replaced Japan as the world’s No. 2 last year and Moody’s has a positive outlook on its ranking.
Moody’s put Japan on review in May, calling on the government to step up efforts to narrow the budget gap. S&P lowered the nation’s grade to AA-, equivalent to the current Moody’s grade, in January, and has the nation under review for a further cut. Fitch Ratings has Japan at AA- with a negative outlook.
Even with the deterioration in its ratings, Japan has enjoyed what Moody’s today called the world’s lowest nominal borrowing costs. Yields on Japan’s benchmark 10-year bonds rose for a third day, to 1.01 percent as of 4:11 p.m. in Tokyo at Japan Bond Trading Co., still down from 1.11 percent at the end of last year. Noda said investors continue to have faith in the nation’s government debt market. Moody’s said there were no signs of Europe’s debt woes spilling into Japan’s bond market.
Japan’s “funding cost advantage will be sustained by considerable institutional and structural strengths, which will prevail even with large budget deficits in 2011 and 2012,” Moody’s said. Japan relies on foreigners to buy less than 10 percent of its debt.
The Nikkei 225 (NKY) Stock Average fell 1.1 percent at the 3 p.m. close in Tokyo. The lack of market ructions contrasts with the S&P downgrade of the U.S., which was blasted by the Obama administration for being influenced by faulty accounting.
S&P’s Aug. 5 decision roiled global markets and boosted demand for Treasuries, sending the yield on the 10-year note, the benchmark for home mortgages and car loans, to a record low 1.97 percent. The New York-based company, which was blamed in an April Senate report for helping fuel the credit crisis, was criticized by the world’s most successful investor, Warren Buffett, who said the U.S. should be “quadruple-A.”
Moody’s said today’s decision was “prompted by large budget deficits and the build-up in Japanese government debt since the 2009 global recession.”
Japan’s public debt is projected to reach 219 percent of gross domestic product next year even before accounting for borrowing to fund reconstruction after the March 11 earthquake, according to the Organization for Economic Cooperation and Development.
The government has amassed a debt of 943.8 trillion yen, according to the Finance Ministry, after two decades of fiscal spending to energize an economy hobbled by the collapse of an asset bubble in 1990 and lingering deflation that’s sapped private demand. The yen’s advance threatens exports, a main driver of the nation’s economic growth.
Prime Minister Naoto Kan’s efforts to reduce Japan’s debt have been stymied by opposition within his party to tax increases. Kan has said he will step down on Aug. 26 if bills for renewable energy and deficit-bond funding are passed.
The International Monetary Fund said on July 19 that Japan needed to push forward with new tax measures and limit bond issuance to pare its debt. It recommended raising the sales tax to 7 percent or 8 percent in 2012 from 5 percent, then gradually increasing it to 15 percent over several years. The IMF also said that outstanding government bonds could exceed total financial assets owned by households in five to 10 years barring policy changes, suggesting the government may need to rely more on foreign investors to fund its deficits.
The government has pledged to raise the sales tax to 10 percent by the middle of the decade. The additional revenue is intended to pay for social welfare for the aging population.
Japan’s government plans total spending of 19 trillion yen ($248 billion) over five years to rebuild after the magnitude-9 temblor and tsunami that devastated the northeast coast of Japan and triggered the worst nuclear crisis since Chernobyl.