ANALYSIS-Japan's resource needs add to yen intervention doubts

Published: 18 Sep 2009 00:27:12 PST

* Raw materials and currency policy closely intertwined

* New government has fresh views on yen strength

* China's push for greater yuan role to challenge yen

TOKYO, Sept 18 - Japan's increasing need to secure raw materials overseas for its manufacturers is helping the country accept a stronger currency and underscores the growing argument against yen intervention.

As debate rages over whether Japan has formally abandoned its policy of stemming yen strength to protect exporters, the issues of buying raw materials and currency policy are closely linked.

Commodity prices are expected to eventually scale last year's heights and keep pushing higher due to huge demand from emerging market countries, especially fast-growing China.

A stronger currency makes it cheaper to buy resources, which may help Japan come to terms with a rising yen and what some see as China's push to make its currency the dominant one for trade transactions in Asia.

"Japan, as a basic stance, should not think about undermining its currency," said Eiji Hirano, executive vice president at Toyota Financial Services and a former senior Bank of Japan official.

"Japan must think about how it secures resources and for that it needs to own a strong currency."

Japan is starting to fret it will become very costly to buy the coal, oil and iron ore needed to keep its factories humming. Just this year the country added two minor metals to its rare metal stockpile for the first time since its inception in 1983.

But a change in government has brought in officials more willing to change old policies and talk about doing more with Japan's vast foreign reserves of $1 trillion and allow the yen to strengthen.

Such debate is likely to get louder with China expected to overtake Japan as the world's second-largest economy next year while Japan's population shrinks and also ages rapidly.

"Japan must safely and stably secure resources in order to achieve steady growth without hampering the manufacturing sector that needs industrial metals," said Junichiro Takeuchi, a senior researcher at the Japan Center for Economic Research.

"A strong currency enhances the country's purchasing power, which is vital in a globalised economy."

Japan has long been allergic to yen appreciation, seeing it as damaging to its export-led growth model and justifying huge bouts of intervention to stem currency strength in the past.

After having halted intervention for more than five years and with officials talking about the yen being used more around the world, the need for resources adds to the reasons a stronger currency is in the national interest.

Japan's resource needs are substantial.

It is the world's biggest net food importer and has to source about 96 percent of the resources it needs to produce energy from abroad, forcing trading and mining firms to seek tie-ups overseas to safeguard grains and raw materials.

The new government of Prime Minister Yukio Hatoyama has made clear it is taking a different tack on currency policy.

New Finance Minister Hirohisa Fujii said it was "one-sided thinking" to focus only on the export benefit of a weaker yen.

Bank of Japan Governor Masaaki Shirakawa said it was possible for a stronger yen to benefit the economy in the long run.

The yen jumped to a seven-month high against the dollar this week and on Friday was trading around 91.3. The BOJ's trade-weighted yen index is just 7 percent below an all-time high hit in December.

The yen itself hit a 14-year high of 87.10 against the dollar in January. Its historical peak was around 80, reached in 1995.

For a graphic comparing the yen's trade-weighted value and Japan's energy import costs: click http://graphics.thomsonreuters.com/099/JP_CRCYRES0909.gif

JAPAN EYES CHINA

China has stepped up its strategic stockpiling of rare metals and food while Beijing has lent funds to state-owned firms that have gone on a buying spree around the world, from mines in Australia to oil fields in Africa.

In addition, China is stepping up efforts to internationalise use of the yuan, with its pilot scheme for trade settlements launched this year laying the groundwork.

China has taken steps that may lead the yuan to join currencies in the IMF's Special Drawing Rights (SDRs), another step towards internationalising the yuan, said Xiao Minjie, senior economist at Daiwa Institute of Research in Tokyo.

"China isn't aiming to replace the dollar as a key currency. It's all about circulating the yuan more in global transactions so China can invest directly in infrastructure and other projects overseas where third countries also have the yuan, freeing the settlements from the currency risk of the dollar," he said.

"This is a threat for the yen. The yen's relative presence will decline."

Xiao said the yen would likely maintain an edge over the yuan because the Japanese currency was an established hard currency, while the yuan was only starting to be used outside China and foreign investors had concerns about the country's various risks.

While the dollar would remain the global currency for a long time, analysts said it was in a long-term decline and therefore Japan needed to factor this in given its reserves were concentrated in dollar assets.

"Japan should naturally debate whether it needs to have a long-term hedge against such a development," Hirano said. "As Japan's ability to buy resources weakens with falling earnings of foreign currency through trade, Japan needs to cover that with commodities investment using foreign reserves."

"Over the long run, it is possible that Japan will diversify and efficiently boost in its foreign reserve investment."