Wary of Fed-driven yen spike, Bank of Japan prepares to act

By Leika Kihara ,Reuters

TOKYO — When the Federal Reserve flagged a new round of aggressive monetary easing back in August 2010, the yen rally that followed wrong-footed Japanese central bankers and forced them to act under pressure from angry politicians and fast-moving markets. Today, as the yen climbs again on expectations of more Fed quantitative easing — injecting vast amounts of cash into the economy via government bond purchases — the Bank of Japan (BOJ) is determined to avoid making the same mistake again.

For now, Tokyo still relies on verbal threats to keep traders at bay, but the BOJ has its finger on the trigger and is ready to act once the yen’s climb gains momentum and threatens the economy’s fragile recovery from the March 11 disaster.

The Fed’s pledge to keep interest rates near zero at least until late 2014 has spurred speculation that another round of hefty Treasury bond buying will follow and Japanese policymakers are now trying to anticipate how markets will respond. Back in 2010 Fed Chairman Ben Bernanke’s hint at more bond buying in a speech in August and expectations of hundreds of billions of dollars flowing into the market accelerated the yen’s rise, pushing it to 15-year highs against the dollar in September. Japanese officials were surprised by the extent of yen gains and the BOJ had to call an emergency meeting on Aug. 30 just three weeks after a regular rate review. “We can’t let the same thing happen again,” said a source familiar with the central bank’s thinking. Any easing in response to sharp or prolonged yen rises would most likely come through a further increase in asset purchases. “Our basic stance is to always be ready to act. This is particularly important when other major central banks are all in easing mode,” said another source. Both sources spoke on condition of anonymity due to the sensitivity of the matter. Tokyo also will not hesitate to intervene to curb yen rises and carefully wait for the best timing to maximize the effect. Finance Minister Jun Azumi on Friday turned up the heat, describing recent yen moves as speculative and threatening to act decisively against “one-sided” moves. Many market players say the trigger could be a sharp yen spike past the record 75.32 to the dollar hit last October. “Authorities probably won’t leave unattended a dollar fall below 76 or 75. If they were to intervene, it could be when the dollar falls below 75 because once that level is breached, yen rises may accelerate,” said Yunosuke Ikeda, chief currency strategist at Nomura Securities in Tokyo. Even if Japan holds off on intervention due to G-7 criticism over last year’s solo actions, the central bank may ease policy in coming months if yen rises are sustained long enough to pose severe damage to business sentiment, analysts say.