Japanese authorities will tell their G20 colleagues in Los Cabos that they stand ready to take “appropriate action” against the soaring value of the yen as capital continues to pour out of the crisis-mired eurozone and into safe haven currencies.
“We think that disorderly and excessive exchange rate movements are not constructive and we will monitor the exchange market and act in an appropriate and timely manner,” Japan’s vice finance minister for international affairs Takehiko Nakao told Emerging Markets on the eve of the G20 summit.
“This is my idea and it is consistent with the attitude of the G7,” said Nakao, while refusing to be drawn further on Tokyo’s response to any further developments.
He spoke as continued financial market turbulence emanating from the eurozone threatened to drive the yen back to historic highs touched last year, jeopardizing Japan’s still tenuous economic recovery and damaging business confidence and corporate earnings.
Nakao’s implied threat of further foreign exchange market intervention came within days of an indication by a senior IMF official that such intervention could be justified in certain circumstances.
In an unusually explicit statement on this issue, IMF first deputy managing director David Lipton said in Tokyo last week that the Japanese currency was “moderately over-valued” such that official intervention could be justified in certain circumstances to restore balance in currency markets.
“Our view is that Japan should have a floating exchange rate system where the exchange rate is set in the market place,” Lipton said. “At the same time, we see volatile capital flows where risk-aversion and risk-taking can create volatility. In that setting, intervention can be used to avoid disorderly markets.”
Japanese officials played down expectations of unqualified financial support by Japan for the euro area. Japan has already been purchasing 10% or more than E5 billion of new bonds issued by the European Financial Stability Fund (EFSF) and has announced a $60 billion loan to the IMF.
Increasingly, claims are heard now in Japan that at the time of the Asian crisis in 1997, Europe declined financial aid to Asia - leaving it to the IMF to provide funds - and that if Japan and other Asian countries are to help European countries they should demand that conditions be attached.
“I am not saying that the IMF should impose very strict conditionality as retaliation but what I am saying is that we should have appropriate conditionality to safeguard the resources of the IMF and to avoid moral hazard,” Nakao said.
A similar view was expressed by former deputy managing director of the IMF, Shigemitsu Sugisaki. “Asian countries are willing to help Europe but on condition that [eurozone economies] tackle their own assignments first,” he told Emerging Markets.
“At the time of the Asian crisis, European countries did not want to get involved in Asia. They said it was an Asian problem and if they agreed to help that would be a moral hazard. We never expected Asia to become like this.”