Japan’s Recession Threat Lessens Following G-7’s Joint Intervention on Yen

By Keiko Ujikane and Michael Heath - Mar 19, 2011 10:35 AM GMT+0800

Japan’s risk of becoming the first Group of Seven member to return to a recession after the global financial crisis eased as the G-7 intervened to halt the yen’s appreciation.

The G-7’s yen sales sent the currency down the most since September, to 80.58 per dollar at the close yesterday in New York, compared with the postwar high of 76.25 reached March 17. Japan’s Vice Finance Minister Fumihiko Igarashi said in an interview “we confirmed” further intervention could be done.

“The risks to the downside for Japan’s economy were reduced significantly by the G-7 intervention,” said Takuji Aida, a senior economist at UBS AG in Tokyo. “This coordinated action may help corporate sentiment to recover, a key factor in reviving growth, along with public spending.”

Reduced scope for yen gains would limit damage to exporters’ earnings once companies from Toyota Motor Corp. to Sony Corp. restart factories. Focus now turns to the duration of electricity cuts in the aftermath of the nation’s record earthquake. At the crippled Fukushima Dai-Ichi nuclear power plant, engineers worked to restore power used for pumps needed to protect fuel rods from overheating and releasing radiation.

Paring Loss

The Nikkei 225 (NKY) Stock Average closed 2.7 percent higher yesterday, paring its slide since the disaster to 12 percent. The tumble in equities in the aftermath of the quake, in conjunction with the rising yen, threatened to impair companies’ balance sheets ahead of the March 31 close to the fiscal year.

To aid companies with fund-raising concerns, Prime Minister Naoto Kan’s government may provide more than 10 trillion yen ($124 billion) of loans, the Nikkei newspaper reported without saying where it obtained the information.

Japan’s economy, the world’s third biggest, may skirt a contraction and grow about 1 percent this year as the nation rebuilds after the March 11 temblor and tsunami, according to UBS and Nomura Holdings Inc.

The Federal Reserve, European Central Bank, Bank of England, Germany’s Bundesbank, the Bank of France, the Bank of Canada and the Italian central bank said they joined the yen sales. A Japanese government official said on condition of anonymity that his country probably sold less than 2 trillion yen, the amount it used in its last intervention. Yesterday’s drop in the yen was the biggest since Japan’s unilateral sales on Sept. 15.

‘Very Problematic’

“The risk of the yen rising unchallenged to uncompetitive levels would have been very problematic in an economy where, outside of export dynamism, there’s really been very little dynamic for growth,” said Richard Jerram, head of Asian economics at Macquarie Securities Ltd. in Singapore. The intervention is “a significant help” to the economy, he said.

Japan’s economy had already shrunk in the fourth quarter of 2010 as government stimulus measures adopted during the global financial crisis were phased out. The nation has suffered limited growth and sustained declines in consumer prices as an aging and shrinking population undercut domestic demand.

Every one yen that the currency appreciates against the dollar erodes about 30 billion yen from Toyota’s earnings, according to the company. Honda Motor Co., which produces more than 70 percent of its vehicles outside Japan, loses 17 billion yen for each yen the currency strengthens.

“We won’t manipulate it, but I hope that the yen goes back to where it was before the earthquake,” Igarashi said in the interview in Tokyo March 18. He added that he hoped the G-7 action would put a floor under the currency.

Yen’s Climb

The yen has appreciated 3 percent against the dollar since the close the day before the magnitude-9 quake. The currency, which has now strengthened 19 percent in the past two years, rose in recent days on speculation Japan’s insurers would repatriate overseas assets. Economic and Fiscal Policy Minister Kaoru Yosano has said there was no basis for such speculation.

Nomura analysts see the economy expanding 1.1 percent this year, 0.4 percentage point less than their estimate before the disaster struck. The earthquake and tsunami ripped apart northeastern towns, killing thousands and damaging nuclear reactors at Tokyo Electric Power Co.’s Fukushima Dai-Ichi plant. Almost 400,000 people remained in evacuation shelters yesterday.

Soldiers and firefighters from Tokyo, using dozens of fire engines, doused sea water on reactor No. 3 yesterday, after an explosion this week. TEPCO also said it may finish reconnecting a power line to the No. 2 reactor.

U.S. Optimistic

Admiral Robert Willard, head of the U.S. Pacific Command, said he was cautiously optimistic that the damage can be contained and a “worst-case scenario will never be encountered.”

The risks to an economic recovery include an uncertain power supply, with the nation facing rolling blackouts and Citigroup Inc. warning this week that the nation may face an “irreversible” blow to capacity. Household sentiment has also suffered.

“Japan has little choice but to rely on exports as consumer spending will likely stay weak,” saidJunko Nishioka, chief economist at RBS Securities. “Service consumption will likely slump even in the Tokyo area as consumers may be discouraged from going out because of the confusion resulting from the earthquake, such as the power shortage,” she said.

Before the quake, Japan’s economy was showing signs of a revival, after shrinking an annualized 1.3 percent in the fourth quarter of last year.

The central bank yesterday repeated its pledge to pursue “powerful monetary easing” and added 3 trillion yen to the financial system, bringing its total emergency fund injections this week to 37 trillion yen. On March 14, it doubled an asset- purchase fund to 10 trillion yen, pledging to step up purchases of securities including government debt, exchange-traded funds and real-estate investment trusts.

To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net;Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst in Hong Kong atppanckhurst@bloomberg.net