Q+A-What is Japan opposition party's policy on FX?

Thu Aug 20, 2009 3:20am EDT

By Charlotte Cooper and Hideyuki Sano

TOKYO, Aug 20 (Reuters) - Japan's policy on the yen exchange rate is not expected to change in the short term if the main opposition Democrats win an election this month, and the party is expected to take a pragmatic approach to FX reserve management.

Longer term, analysts say it is hard to gauge how the untested Democratic Party of Japan would react to a rising yen if the economy faltered, although DPJ officials appear to favour a more hands-off attitude than Japan has had in the past.

DPJ officials have said Japan should start thinking of a strong yen as in its interest, a departure from traditional thinking that a weak yen helps exports.

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

But that approach changed. It 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.

Polls show the DPJ has its best shot ever at ousting the LDP from power in Aug. 30 elections. Analysts say if the Democrats do win, it will be no surprise to the market and at the moment the exchange rate is largely being driven by global factors.

Following are some questions and answers on how the market sees the Democrats' currency and reserves policy.

WHAT HAS THE DPJ SAID ABOUT EXCHANGE RATES?

Officials such as Secretary-General Katsuya Okada, seen as a possible finance minister, 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. See [ID:nT241454] and [ID:nT372896]

DPJ lawmakers have criticised the LDP as pandering to big exporters by trying to weaken the yen in the past, largely at the expense of consumers who could have enjoyed the benefit of the yen's higher purchasing power.

But back in January, Masaharu Nakagawa, the party's "shadow" finance minister, said the rising yen could further damage severe economic conditions and if moves were very rapid, Japan should intervene to slow it down. [ID:nT16092]

WHAT DOES THE MARKET THINK THEY'LL DO?

Many expect them to stick to the current 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 party leader Yukio Hatoyama has said they will decide how to manage forex reserves once they take power. [ID:nTKU105481]

Japan has the world's largest foreign exchange reserves after China. While the currency composition is not known, a large part of its $1 trillion reserves is considered to be in dollars.

Nakagawa has said he was worried about the future value of the dollar and that Japan should consider asking the U.S. to issue debt in yen as 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 analysts say he will not automatically get the finance minister post if the DPJ wins. Other prominent party officials have played down any sudden changes and say it is in Japan's interests to keep the dollar as the main reserve currency.

Many analysts say the DPJ 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, deputy party spokesman on finance, has said dollar investment of reserves could be broadened but any changes to FX reserves management should avoid moving the FX market.

Analysts also say getting the United States to issue debt in yen is highly unlikely.

(Editing by Kim Coghill)