Japan Sets Up Fund To Battle High Yen

Online, August 29, 2011 (Newswire.com) - The Japanese government on Wednesday announced a new $100bn fund to help companies combat the strength of the yen. The Ministry of Finance said the fund will help firms expand their overseas operations and secure energy resources. The move comes as the yen hovers near record levels against the US dollar hurting Japan's export-dependent economy, and companies have warned that they may lose business to foreign rivals. Under the loan program, the government will send foreign currency reserves to the Japan Bank for International Cooperation, which will then make loans to commercial banks so they can help companies with overseas investments. By spending yen for dollars and other currencies, the ministry hopes that the currency will weaken somewhat. The yen was little changed, with the dollar trading at 76.96 yen late in New York, up slightly from 76.64. The second part of the government's action is an effort to curtail speculation that officials think might be contributing to moves in the yen. Mr. Noda has indicated recently that the government will act against speculators seeking short-term profits.

The government's announcement came hours after Moody's Investors Service, the credit ratings agency, lowered Japan's credit rating sovereign credit rating to Aa3 to discourage further gains in the yen, which just last week surged to a record high against the dollar below Y76. Moody's warned that frequent changes in administration, weak prospects for economic growth and its recent natural and nuclear disasters have made it difficult for the government to pare down its huge debt. In addition strengthening oversight of foreign exchange markets, the finance ministry will establish a $100 billion facility to encourage companies to exchange yen for foreign currency-denominated assets. The new fund will use some of the country's massive stockpile of $1.15 trillion in foreign reserves.

Japan's announcement works at cross purposes. It's a tacit acknowledgement that the world's third-largest economy is reluctant to fight investors who use the yen as a safe-haven as they flee global turmoil. Some analysts saw the moves as a sign that direct yen-selling from the Bank of Japan won't occur anytime soon, which could embolden traders to eventually probe the yen's upside anew. Earlier this month, the central bank and government stepped into the currency markets in an attempt to cut the strength of the yen. While analysts agreed that Wednesday's move may achieve its objective of weakening the currency, they said the move is unlikely to trigger an overseas shopping spree by Japanese companies.