Q+A-What is Japan new govt's view on forex?

Wed Sep 16, 2009 6:06am EDT

By Hideyuki Sano

TOKYO, Sept 16 (Reuters) - Japan's new finance minister sent the yen up 0.9 percent on Wednesday, saying he did not see a problem with a recent slide in the dollar, but overall yen policy is not expected to change under the incoming government.

Longer term, analysts said it was hard to gauge how the untested Democratic Party-led government would react to a rising yen if the economy faltered, and there was a question mark over its attitude to managing Japan's huge foreign currency reserves.

Hirohisa Fujii, the new finance minister, has said a strong yen is good for Japan as it increases people's purchasing power, a departure from past thinking that a weaker yen was needed to help exports. Fujii also said Japan should not intervene in currency markets unless rates move abnormally. [ID:nT286998]

Under the previous long-ruling Liberal Democratic Party (LDP) government, the country intervened heavily in the currency market earlier in the decade to stop a rising yen from harming exports, a key driver of the economy.

But that approach changed. Japan has not stepped in now for more than five years, staying out even when the yen JPY= hit a 13-year high of 87.10 yen per dollar in January.

Following are some questions and answers on how the market sees the new ruling party's currency and reserves policy after it won power in an election on Aug. 30.

WHAT HAVE THE DEMOCRATS SAID ABOUT EXCHANGE RATES?

Officials such as Katsuya Okada, foreign minister in the new government and previously the party's No 2 executive, have said recently that trying to move exchange rates artificially is undesirable in the long run and Japan should change the model of relying on exports.[ID:nT241454] [ID:nT372896]

Democrat lawmakers have criticised the previous administration as pandering to big exporters by trying to weaken the yen, largely at the expense of consumers who could have enjoyed the benefit of a stronger yen's purchasing power.

WHAT DOES THE MARKET THINK THE NEW RULING PARTY WILL DO?

Many expect it to stick to the outgoing administration's approach, which is to follow the G7 rich nations' stance.

The G7 says excess volatility and disorderly moves have adverse implications for stability and it monitors markets closely and cooperates as appropriate. In effect, Japan has not gone beyond firing verbal warning shots since 2004.

Domestically, analysts say now isn't the time to call for a stronger exchange rate with exports leading the economy out of recession, and longer term the Democrats are expected to be pragmatic as they have support from groups such as some labour unions who have an interest in a weaker yen.

"In the past, many DPJ lawmakers favoured a stronger yen, and said buying the dollar too much would be risky. But as the chance of taking power has become real, they have become grown-up," said Mitsuru Saito, chief economist at Tokai Tokyo Securities.

"I think the perception that they would like to see a stronger yen is fading."

But being more pragmatic does not mean analysts expect the DPJ would intervene if the yen does strengthen, except to smooth volatility. Attempting to lower the exchange rate could cause friction with other countries when many are trying recover from the global crisis.

HAVEN'T THEY RAISED QUESTIONS ABOUT DOLLAR FX RESERVES?

Some individuals have, but others say it's not an issue and the new prime minister, Yukio Hatoyama, has said they are still undecided on how to manage forex reserves.

Japan has the world's second-largest foreign exchange reserves, behind China.

While the breakdown is not known, a large part of the $1 trillion reserves is thought to be in dollars.

About two-thirds of the total is invested in sovereign bonds, the government said last year.

In terms of maturities, slightly more than a quarter is in bonds with maturities of five years or longer.

Masaharu Nakagawa, the party's former finance spokesman, has said he was worried about the dollar's future, that Japan should consider asking the U.S. to issue debt in yen and Tokyo should reconsider how it piles up dollar assets. [ID:nT239417]

Nakagawa's comments put the dollar under pressure in May, especially as China had also called for reserve system reform, but he was not a member of the new cabinet unveiled on Wednesday.

Other prominent party officials have played down any sudden changes and say it is in Japan's interest to keep the dollar as the main reserve currency.

Many analysts say the Democrats would have no choice but to stick to the current reserves make-up, as selling the dollar in the market could backfire by bringing down its value against the yen.

Tsutomu Okubo, at the time the party's deputy spokesman on finance, said dollar investment from the reserves could be broadened but changes to foreign reserves management should avoid moving the currency market.

Analysts also say getting the United States to issue debt in yen is highly unlikely. (Additional reporting by Charlotte Cooper; Editing by Kim Coghill and Rodney Joyce)