Japan rules out FX devaluation, signals action vs abrupt yen surge

Japan will refrain from competitive currency devaluations but retains the right to act against short-term yen swings, the country’s policymakers stated Friday, signaling their readiness to step into the market to counter any abrupt spike in the currency that threatens a fragile economic recovery.

Finance Minister Taro Aso declined to comment on whether Tokyo was ready to conduct yen-selling market intervention.

But he said the Group of 20 communique’s warning that excessive and disorderly currency moves were undesirable, meant Japan had the right to step into the market if the yen’s spike was out of line with fundamentals.

“Taking necessary action against (excess volatility and disorderly currency moves) would be in line with the G20 agreement,” Aso told reporters after the G20 finance leaders’ gathering.

BOJ WATCHING MARKETS

Japanese officials have escalated their verbal warnings to yen bulls against pushing up the currency too much. But they have failed to turn the market tide as investors bet that Tokyo will not be able to intervene due to a G20 agreement warning countries against competitive currency devaluations.

In a meeting with U.S. Treasury Secretary Jack Lew on Thursday, Aso conveyed Tokyo’s “strong concern” over what it saw as “one-sided” yen rises.

But Lew reiterated his warning that Japan must refrain from competitive currency devaluations, suggesting that Washington was in no mood to allow Tokyo to intervene to weaken the yen.

A senior Japanese Finance Ministry official said Tokyo will not resort to competitive currency devaluations that aim to keep the yen artificially low for a very long time to boost exports.

But Japan can step into the market to arrest short-term yen swings, such as the currency’s sharp rises during the first half of February, the official told reporters.

Bank of Japan Governor Haruhiko Kuroda told the same news conference that the central bank was watching yen moves carefully due to the effect they had on the economy.

“If (yen moves) have a negative impact on the economy and prices, particularly on prospects for achieving our 2 percent inflation target, we won’t hesitate to take additional easing steps,” Kuroda said.

BOJ policymakers will likely debate the possibility of easing policy further at a rate review this month, as a raft of gloomy data threatens their scenario that a moderate economic recovery will accelerate inflation toward 2 percent, sources familiar with their thinking said.

Source: Reuters