Japan'ese Finance Minister Jun Azumi, centre, speaks to media at the Finance Ministry in Tokyo on Oct. 31, 2011.KYODO
The Japanese government has defended its unilateral intervention in the currency markets after criticism from Europe that its action could reignite global "currency wars".
Jun Azumi, Japan's recently appointed finance minister, said his decision to order the Bank of Japan to sell yen and buy dollars was "within the scope" of international currency policy and that he was engaged in "a battle of nerves" with the markets that are far from reflecting the economic fundamentals of his country.
Mr. Azumi ordered the intervention on Monday after the yen reached a fresh post-war high against the U.S. dollar, further threatening the profits and competitiveness of Japan's all-important export sector. The intervention sent the yen down 5.1 per cent from its high of ¥75.35 ($0.96).
Yoshihiko Noda, prime minister, will likely face questions over the intervention at the G20 summit in Cannes later this week following criticism from officials in Paris on Monday. German officials also stressed the importance of co-ordinated intervention.
Japanese exporters have struggled with the persistently strong yen, which has been driven higher by the perception that it is a safe haven from the euro zone debt crisis, and amid worries about the global economic outlook.
It is not within Japan's scope to follow the Swiss by putting a ceiling on its currency given the size of both the dollar-yen market and its economy, and owing to its responsibilities as a G7 member. Strategists have said that this limits the action Tokyo can take to short sharp bursts of intervention.
Traders estimate that Monday's intervention was between ¥7,000-billion and ¥10,000-billion, which, if correct, would make it Japan's largest one-day intervention, and much greater than the current record of ¥4,500-billion set in August.
The government is also introducing medium-term measures to help manufacturers and encourage them to keep their factories in Japan, such as subsidies for new plants and cheap loans to take advantage of the strong yen and invest overseas.
Japan still has plenty of ammunition should it opt for more of these one-day bursts. Barclays Capital points out that the finance ministry currently has ¥24,000-billion available for intervention, but with the limit on financing bill issuance likely to be lifted in the third supplementary budget, the investment bank estimates the MoF's resources could soon increase by ¥15,000-billion to ¥39,000-billion.
The yen was already retracing its steps by mid-afternoon in Tokyo on Tuesday and was trading at ¥78.13.