Declining greenback may find bolster from the Land of the Rising Sun

Many economists and currency analysts are beginning to wonder whether the dollar’s sharp declines in recent weeks will push the ministry to try another large-scale intervention. So far, it has chosen not to act, signaling a willingness to let market forces take their course. But if the dollar continues its drop, threatening Japan’s export-led economic growth, analysts say the government could come under increasing pressure to act.

“The ministry has shown itself very reluctant to intervene this time,” said Tohru Sasaki, chief foreign exchange strategist at JPMorgan Chase in Tokyo. “But the ministry may feel it has to do something” if the dollar continues to fall. JPMorgan Chase’s agreement on Sunday to buy Bear Stearns rekindled uncertainty over the fate of American banks in the extremely tight credit market. On Monday, the dollar remained below parity of 100 yen, falling as low as 95.72 here during the trading session, its worst level since August 1995. In New York later, it settled at 98.04 yen.

In the last month, the dollar has dropped more than 10 per cent against the yen. Concern for Japanese corporate profits, combined with fears of the effects of an American recession, drove the Nikkei 225 index down 3.7 per cent on Monday, to a two-and-a-half-year low. On Tuesday, the index was higher.

Over the weekend, articles in Japanese newspapers discussed when the finance ministry would be forced to step in and help shore up the dollar. On Monday, finance minister Fukushiro Nukaga added to the speculation by calling the dollar’s recent declines “excessive”, signalling growing concern.

If the ministry does act, it will bring with it some of the world’s deepest pockets. During previous interventions in the currency markets, the ministry accumulated about $1 trillion worth of US Treasury debt and other non-yen assets, helping make Japan foreign currency reserves second only to China’s. It would also bring the prestige of a powerful financial institution with considerable autonomy to act in the national interest, though the ministry’s wings have been clipped in recent years by a series of scandals.

Yet economists and currency analysts say it still appears reluctant to take action, at least alone. One reason is that there is widespread doubt here that Japan can do much on its own to slow the dollar’s decline. The sources of the dollar’s weakness, the argument goes, lie in the US, which is in the midst of a severe housing slump and a broad economic slowdown.