February 20, 2009 / 2:11 AM / 9 years ago

UPDATE 2-Japan says forex stability needed for economy

(For more stories on the Japanese economy, click [ID:nECONJP]) (Adds BOJ’s monthly report)

By Leika Kihara

TOKYO, Feb 20 (Reuters) - Japan needs to help ensure exchange rates are stable for its economy to recover, its new finance minister said, as slumping global demand batters exports and pushes the nation deeper into recession.

A rapid rise in the yen, which cuts into the value of overseas earnings when repatriated, has only rubbed salt into wounds for manufacturers such as Toyota Motor Corp (7203.T) and Sony Corp (6758.T), many of whom have fallen deep into the red and are restructuring as their main markets contract sharply.

Data this week showed Japan’s economy shrank at an annual rate of 12.7 percent in the last quarter -- its fastest rate since the first oil crisis in 1974, and three times the fall in gross domestic product in the same quarter in the United States.

The central bank underscored corporate pain in its monthly report on Friday, reiterating that company profits were deteriorating faster as exports and capital investment fall sharply. [ID:nTKG004294]

“First of all, we need to ensure Japan’s exchange rates are stable,” Finance Minister Kaoru Yosano told parliament.

The Japanese currency has climbed almost 15 percent versus the dollar and 30 percent against the euro since the collapse of U.S. investment bank Lehman Brothers in September as investors dumped carry trades.

Japan’s low interest rates had made the yen popular for years as a source of cheap funds for carry trades -- borrowing the yen to buy higher-yielding assets.

The yen, however, has weakened to around 94 to the dollar JPY= from a 13-½ year high of 87.10 hit last month as investors fret about the fast-deteriorating economy.

    Japan has not intervened in the currency market since March 2004, after a 15-month-long, 35 trillion yen ($371.7 billion) selling spree aimed at preventing the currency’s strength from snuffing out an economic recovery.

    Yosano, who is also economics minister, also said that a global policy response was necessary to stem the widening fallout from the worldwide financial crisis.

    “It’s hard to imagine a situation where Japan alone recovers,” he said.

    Yosano replaced Shoichi Nakagawa, who resigned as finance minister on Tuesday after being forced to deny he was drunk at a G7 news conference in Rome over the weekend. [ID:nT79787]

    The Ministry of Finance sets foreign exchange policy, deciding whether and when to intervene, while the Bank of Japan implements it. ($1=94.16 Yen) (Additional reporting by Rika Otsuka; Editing by Edwina Gibbs)

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