Intervention junkies--addiction without end?

JAPAN'S MINISTRY OF FINANCE has lost more than 70 billion dollars in the past financial year trying to bet against currency speculators. Cabinet Office insiders admitted in January that the currency losses have spiralled out of control, after a renewed attempt by the Finance Ministry to prop up the dollar and talk down the value of the yen.

The insiders told us that losses in a special ministry account that hold the government's intervention reserves are expected to soar to [yen]7.8 trillion ($70 billion) by the end of the financial year.

The government spent a record sum in January trying to prevent the yen from rising too high against the dollar, a movement that would hurt Japan's allimportant exporters--on whose prosperity hopes of an economic recovery are pinned.

However, in mid-January Tokyo trading it was clear that Japanese exporters were also preventing the massive currency intervention program from succeeding. As the yen fell to 107.5, a number of carmakers were understood to be dumping large amounts of their foreign-earned dollars on the market.

When the ministry's huge losses are officially confirmed later this year, Junichiro Koizumi, the Prime Minister, will face pressure to prove that his controversial currency intervention strategy is working.

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The battering to the ministry's foreign exchange account arises because the department is selling its own currency for dollars. As the value of the greenback continues to plunge, so too does the value of the dollars that the Japanese government has already purchased.

At the start of fiscal 2003, the ministry assumed an average exchange rate of [yen]121 to the dollar. That was revised up to [yen]115 by November.

In January, the figure jumped to just over [yen]105.

The special account's paper losses will be realized once the ministry begins to unwind its huge holdings by selling dollars at these lower levels in exchange for yen. However, currency analysts we contacted suggested that the outlook for the dollar/yen exchange rate looks set to favor a continued slide in the greenback. This means that Japan is likely to continue accruing vast paper losses.

One currency broker in Nomura, the Japanese securities house, told us: "The (ministry) is like an intervention junkie at the moment. The effect of each shot of dollar buying is getting less and less, which means the shots have to be bigger and bigger. The odd shock move makes only a very temporary difference."

Japanese monetary authorities have effectively confirmed that the losses will not deter them from trying to swing the currency markets. So far this year, the Bank of Japan (BOJ) has bought an estimated $20 billion, and officials have assured markets that the intervention will continue.

In a surprise move, the BOJ eased monetary policy in what some economists said was an attempt to offset the failures of its intervention efforts. The central bank raised its liquidity target under its quantitative easing policy by [yen]3 trillion to a new range of [yen]30 trillion to [yen]35 trillion, a margin that gives the BOJ scope to help the finance ministry's battle against the rising yen.

However, beyond that measure, analysts and BOJ sources have pointed out that Japan does not, in fact, have many policies to choose from beyond more costly intervention. The BOJ has virtually no scope for serious monetary easing, and Koizumi's structural reform program has tied the ministry's hands by piling on more fiscal spending.

--The Editors