When the Federal Reserve flagged a new round of aggressive monetary easing back in August 2010, the yen rally that followed wrong-footed Japanese central bankers and forced them to act under pressure from angry politicians and fast-moving markets.
Today, as the yen climbs again on expectations of more Fed quantitative easing — injecting vast amounts of cash at near zero rates at least until late 2014 has spurred speculation that another round of hefty Treasury bond buying will follow and Japanese policymakers are now trying to anticipate how markets will react — the Bank of Japan (BoJ) is determined to avoid making the same mistake again.
For now, Tokyo still relies on verbal threats to keep traders at bay, but the BoJ has its finger on the trigger and is ready to act once the yen's climb gains momentum and threatens the economy's fragile recovery from the March 11 disaster.
Back in 2010 Fed Chairman Ben Bernanke's hint at more bond buying in a speech in August and expectations of hundreds of billions of dollars flowing into the market accelerated the yen's rise, pushing it to 15-year highs against the dollar in September.
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Surprised by gains
Japanese officials were surprised by the extent of yen gains and the BoJ had to call an emergency meeting on August 30 just three weeks after a regular rate review.
"We can't let the same thing happen again," said a source familiar with the central bank's thinking.
Any easing in response to sharp or prolonged yen rises would most likely come through a further increase in asset purchases. "Our basic stance is to always be ready to act. This is particularly important when other major central banks are all in easing mode," said another source.
Tokyo also will not hesitate to intervene to curb yen rises and carefully wait for the best timing to maximise the effect. Finance Minister Jun Azumi yesterday turned up the heat, describing recent yen moves as speculative and threatening to act decisively against "one-sided" moves.
Many analysts say the trigger could be a yen spike past the record 75.32 to the dollar hit last October.
"Authorities probably won't leave unattended a dollar fall below 76 or 75. If they were to intervene, it could be when the dollar falls below 75," said Yunosuke Ikeda, chief currency strategist at Nomura Securities in Tokyo.
Even if Japan holds off on intervention due to G7 criticism over last year's solo actions, the central bank may ease policy in coming months if yen rises are sustained long enough to pose severe damage to business sentiment, analysts say.
BoJ Deputy Governor Hirohide Yamaguchi on Thursday ruled out the chance of immediate easing but said the bank is mindful of the strong uncertainty on the outlook.
Back in 2010, Japan's economy was performing well in the first half, expanding an annualised 6.5 per cent in the first quarter and 4.6 per cent in the next quarter, supported by solid exports to fast-growing emerging economies.
That led the BoJ to underestimate the pain from yen gains. The currency began to rise in June and climbed 7 per cent by the end of July. It took another 3 per cent rise in August, which triggered steep falls in Tokyo stocks, for the central bank to ease policy.
The Finance Ministry was also slow in following up, finally intervening to weaken the yen in mid-September after the BoJ's August move failed to halt the yen's ascent.
The cost of slow and poorly coordinated actions were all too clear with growth slowing to 2 per cent in July-September and grinding to a halt in the following quarter. Today the government and the BoJ coordinate better. They intervened and eased policy simultaneously in March, August and October last year.
Tokyo (Reuters) The BoJ is counting on fiscal spending for reconstruction from the March earthquake to offset some of the pain from slowing overseas demand and the yen's rises. But it now says a pickup in activity initially expected early this year may get delayed for several months.
For now, the central bank hopes to counter any adverse market moves by topping up its 55 trillion yen (Dh2.6 trillion) asset buying fund, under which it purchases government and private debt.
It is unlikely to revert to full-scale quantitative easing of 2001-2006, when it targeted deposits parked at the central bank, as it believes it had little effect in stimulating the economy.
But with further increases in the asset-buying fund largely priced in, the BoJ may be under pressure to do more — such as buying more longer-term government bonds and private assets.
"If the government feels it's hard to intervene in the market given US opposition, the BoJ will have to ease policy regardless of whether it is effective or not," said Koichi Haji, chief economist at NLI Research Institute In Tokyo. "The BoJ doesn't want to revert to old-style QE but then, it would have to come up with a different extraordinary move."