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Source: Reuters

ANALYSIS-Japan unlikely to follow SNB in FX intervention

Published: 15 Mar 2009 17:55:04 PST

* Japan intervention unlikely, would spark big trade tensions

* Broad yen drop also argues against intervention

TOKYO, March 13 - Based on the Swiss National Bank's intervention to weaken its own currency, Japan may appear to have reasons to do the same. But analysts say it is unlikely to do so.

Intervention from the world's second-biggest economy as the world scrambles to combat its deepest financial crisis in decades would cause much greater trade tensions than intervention by Switzerland, the world's 22nd biggest economy.

Earlier this decade Japan spent well over $350 billion to push the yen lower but has resisted the temptation to intervene so far during the crisis.

Such intervention now would hit a raw nerve, especially as the Group of 20 nations plan in coming weeks to tackle the global crisis that has been compared with the 1930s Great Depression -- a crash made worse at the time by competitive currency devaluations.

"Competitive currency devaluation is not likely in Japan now because the risks of sparking trade friction are too great," said Masahiro Sato, joint general manager of the treasury division at Mizuho Trust & Banking Co.

"The Swiss can get away with this because of the relatively small size of their economy and the limited role they play in the global economy," he said.

Takahide Nagasaki, chief forex strategist at Daiwa Securities SMBC, agreed:

"A simple comparison between the two countries cannot be made, and it is difficult to say that SNB's move will open the door for Japan to intervene," he said

The SNB announced bold steps on Thursday to fight deflation and underpin the economy. It cut interest rates virtually to zero, reflecting moves by the United States, Japan and Britain, but stunned markets by intervening to weaken the Swiss franc.

That made the SNB the first major central bank in the world to intervene in currency markets during the crisis, raising the prospect its actions could spark a round of competitive currency devaluations as governments move to protect their economies.

In response to the SNB's actions, the euro posted its biggest one-day gain against the Swiss currency and heads turned towards Japan.


Switzerland and Japan face similar economic difficulties that a weaker domestic currency might help offset.

Like Switzerland, Japan is facing the threat of deflation. Both countries are seeing exports demand shrink as world trade crumbles. In both cases, their export efforts are being hampered by relatively strong currencies.

Indeed, Japan's exports are falling at a record pace and the economy is already in its deepest recession since 1974.

But most importantly, Japan spent 35 trillion yen ($358 billion) in the 15 months to March 2004 to prevent a strong yen from snuffing out an economic recovery and worsening deflation.

The historical precedent makes Japan the most obvious candidate to follow the SNB, strategists at UBS said in a client note.

But despite that legacy, the Ministry of Finance, which decides on intervention, has resisted the urge to intervene so far during the crisis, despite strong temptations.

It declined to intervene in October when the Group of Seven industrial powers issued a rare inter-meeting statement singling out yen volatility, giving Japanese authorities the green light to stem its surge.

Even when the yen hit a 13 1/2-year high of 87.10 per dollar in January and exports demand collapsed, the BOJ held back.

Now, the yen has fallen back and stood near 97.95 yen on Friday, putting intervention further in doubt, analysts said.


Switzerland's surprise move came just before the financial heads from the Group of 20 countries meet in England to prepare for a G20 summit in April. Avoiding trade protectionism is a main part of the agenda.

"Japan would not want to weaken the yen when the G20 countries are trying to hold protectionism at bay," Nagasaki said.

A significant factor behind Japan's heavy intervention in 2003 and 2004 was the state of the global economy.

At that time Japan was facing difficulties when other economies were in a much healthier state, said Toru Umemoto, chief FX strategist for Japan at Barclays Capital.

"Currently, almost all countries are suffering from the financial crisis and the global recession ... If Japan intervened in the market currently it would be severely criticised," Umemoto said.

That seems especially true given Japan's large presence in the global economy and role as a major exporter.

"A weaker currency is not necessarily a cure-all because it can fuel capital flight. Japan certainly doesn't want to take on that risk," Mizuho's Sato said. ($1=97.66 Yen)

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