September 29, 2009 / 10:11 AM / in 9 years

Japan's Fujii gets harsh refresher in forex markets

TOKYO (Reuters) - A mere two weeks in the job, Japan’s finance minister has been rudely reminded of the cardinal rule when speaking to markets — less is more.

Since being appointed to a post he briefly held 16 years ago, Hirohisa Fujii has gone through several cycles of remarks that first appeared to favor a strong yen and then seemed to backpedal after markets took him at his word and sent the Japanese currency soaring.

That, analysts say, is because while Prime Minister Yukio Hatoyama’s new government is willing to see a strong yen longer term to boost domestic consumption, it has no desire to see the currency soar short-term and kill off a fragile export-led recovery from Japan’s worst recession in 60 years.

Fujii, a 77-year-old former finance ministry mandarin whose expertise is in fiscal rather than forex policy, had been welcomed by markets as a safe pair of hands after Hatoyama’s Democratic Party won power in last month’s election, ousting the conservatives who had ruled Japan for most of the past 54 years.

The new government has pledged to put more money in the hands of consumers to stimulate domestic growth and wean the world’s second-biggest economy from its dependence on exports.

Fujii’s appointment soothed concerns that spending to finance new programs would inflate Japan’s already huge public debt.

But Fujii, who held the finance portfolio briefly in 1993-94, stumbled when he apparently forgot just how much clout a finance minister’s utterings can have.

“What he is saying is probably right, but as finance minister, he shouldn’t keep repeating it,” said Keio University political science professor Yasunori Sone.

The Nikkei business daily echoed the criticism, and Fujii’s market-jarring comments grabbed negative headlines in other domestic media as well — hardly welcome as the new government struggles with headaches ranging from crafting next year’s budget to keeping ties with security ally Washington on an even keel.

DON’T SHOW YOUR CARDS

“A stance of respecting the realities of the market is not mistaken, and to try to shift the economy away from excessive reliance on external demand to domestic demand-led growth is probably correct,” the newspaper said in an editorial.

“The problem lies in repeating comments that show your cards to the markets in advance.”

The yen hit an eight-month high of 88.22 to the dollar on Monday after Fujii repeated that he wanted to avoid intervention. But the currency then pulled back to near 90.00 to the dollar, giving up all Monday’s gains, after Fujii raised the prospect of intervention to halt “irregular moves.”

Some market experts said Fujii’s seeming flip-flops risked damaging the government’s credibility with financial markets.

“If you are in charge of finance, you can’t make statements that the yen’s strength is not bad for the economy,” said Jesper Koll, CEO of investment consultancy Tantallon Research Japan.

“It’s the difference between an amateur and a professional. A professional can think three or four steps ahead. An amateur is someone who starts to run scared because he has not been ... thinking about the consequences.”

Others sounded a more forgiving note.

“Fujii is basically saying currencies should reflect economic fundamentals and that it is wrong to manipulate their moves to lower the yen for the sake of exporters,” said Junya Tanase, foreign exchange strategist for JPMorgan Chase Bank in Tokyo.

“At the same time, he is not attempting to drive up the yen either.”

Fujii repeated Tuesday his view that global competition to weaken currencies was wrong, but said that this didn’t mean Tokyo would leave excessive yen rises unattended.

Few, however, expect authorities to step in to weaken the yen and help Japanese exporters, at least at current levels, despite the reminder that intervention was still in the arsenal.

Traders and analysts say the dollar would have to fall to January’s 13-year low of 87.10 yen to make the market think seriously about the possibility of intervention but many say a drop through 85 yen would more likely be needed.

“The stance is that in principle they should not intervene, but if the market goes in a bad direction, there’ll be jawboning,” said Tsuneo Watanabe, a senior fellow at the policy research division of think tank The Tokyo Foundation.

Editing by Dean Yates

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