(Adds link to interview with former central bank board member)
TOKYO, Aug 31 (Reuters) - The yen’s surge to a 15-year high against the dollar is threatening Japan’s export-reliant economy, hitting the Nikkei share average and prompting Japanese authorities to consider unilateral currency market intervention for the first time in six years.
While sources have told Reuters the government is not ruling out intervention, traders and analysts believe that the drop in the dollar/yen rate JPY= would have to become much more volatile or deeper for the authorities to take action.
The yen's rise is adding to deflationary pressures on the Japanese economy, and the toll on shares of exporters has driven the Nikkei .N225 down 16 percent -- making it one of the worst performing markets in the world this year next to China and Greece.
WHAT WOULD PROVOKE INTERVENTION?
A sharp drop in dollar/yen, perhaps 1 to 2 percent or more in a single day towards the 80 yen level or below, is seen as the most likely scenario that would prompt Japan to stick its neck out and buy dollars.
Such an abrupt currency move would likely drag the Nikkei down even further, piling up pressure on the government to take action. Suzuki Motors 7269.T CEO Osamu Suzuki said last week that he hoped the government would hear "our cries of desperation".
From last week both Prime Minister Naoto Kan and Finance Minister Yoshihiko Noda started to hint at possible action to counter yen strength, raising speculation that Japanese intervention may be just around the corner. [ID:nTOE67U03E]
Some traders think a fall in the dollar/yen rate below last week’s 15-year low of 83.58 yen would be enough to trigger intervention.
But others believe the yen’s rise would likely need to accelerate for authorities to justify such a move.
Market volatility gauges have been subdued, and some measures of realised volatility are up only modestly after having dropped to their lowest levels since 2007, just before the global financial crisis began.
For a package on the yen click: r.reuters.com/nef47n
Interview with ex-BOJ board member Mizuno [ID:nTKF106989]
More stories on the Japanese economy [ID:nECONJP]
For a graphic on dollar/yen implied and realised
volatilities, click on: r.reuters.com/bux96n.
Japan may thus have a hard time convincing its G7 partners about the need to intervene just when they are calling on China to make its yuan CNY=CFXS more flexible to ease global imbalances.
Any attempt to cheapen the yen could run counter to U.S. President Barack Obama’s plan to double U.S. exports, especially with mid-term congressional elections approaching in November, raising diplomatic obstacles to intervention by Tokyo.
Many market players think Tokyo will likely hold fire unless the dollar/yen rate slips below its record low of 79.75 yen.
The Bank of Japan’s decision on Monday to expand its fixed-rate fund supply scheme to 30 trillion yen from 20 trillion yen, and to launch a new six-month loan operation in addition to an existing three-month scheme, has done little to curb the yen’s rise.
The onus may then fall on the Ministry of Finance to intervene if the yen keeps on strengthening. The finance ministry makes any decision on currency intervention while the central bank would act as the ministry’s agent.
HAS JAPAN ABANDONED ITS OLD INTERVENTIONIST WAYS?
Japan is not as quick to intervene as it used to be, partly due to a seeming shift of views within the Ministry of Finance on the effectiveness of intervention.
Japan’s authorities haven’t intervened since March 2004, when a 15-month yen-selling spree came to an end. During that period, they sold 35 trillion yen ($414.1 billion), the equivalent of more than one-third of the annual budget.
Even a rare G7 statement between meetings in October 2008, which singled out yen volatility and was seen as giving Japan approval to intervene, did not tempt Tokyo.
Many analysts also think intervention would amount to little more than a drop in the ocean, since the driving force behind the yen’s rise is mounting worry that the U.S. economy is headed for a double-dip recession and the Federal Reserve may boost quantitative easing -- driving down U.S. Treasury yields.
In terms of volume, the amount of dollar buying in currency intervention would only be a small fraction of trading on the world’s massive foreign exchange markets, where $1.7 trillion changes hands in London alone each day, on average.
In the 2003-2004 intervention, the score card was mixed at best as the yen continued to gain gradually during the campaign.
Fear of losses from the currency purchased in intervention may make make Tokyo reluctant. The Swiss central bank, which intervened heavily to curb strength in the Swiss franc this year, has faced criticism for losing $13.6 billion on its intervention. ($1=84.53 Yen) (Editing by Nathan Layne)
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