Yen on the ropes as Bank of Japan holds interest rates at 0.5 per cent
Friday, 18 May 2007
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The battered yen was on the ropes again yesterday after the Bank of Japan left interest rates on hold at its latest meeting.
The decision to freeze borrowing costs at 0.5 per cent came after GDP figures showed the Japanese economy expanded by a smaller-than-expected 0.6 per cent in the first quarter of the year. That pulled the year-on-year rate of increase down to 2.4 per cent, less than half the 5 per cent annual growth enjoyed in the previous quarter. A sharp fall in business investment was blamed for the slowdown.
The figures sparked fears that, while the world's second-biggest economy has grown for nine consecutive quarters, the recovery remains shaky. And, after years of damaging deflation, price pressures remain non-existent. The so-called GDP deflator showed prices in the first quarter were 0.2 per cent lower than a year earlier.
The BoJ Governor Toshihiko Fukui underlined the need to raise rates gradually as the economy gathers pace. Financial markets believe the chance of a rate rise in August is a little more than 50-50. But with rates remaining at rock-bottom levels, there was more pain for the yen. It fell to a three-month low of 121.16 against the dollar and dived to 163.82 against the euro, a whisker away from the record 163.91 hit earlier this week.
Analysts said the yen continued to be a victim of the notorious carry trade - where investors borrow yen at a low interest rate and then invest in higher-yielding overseas assets, selling the yen for the destination currency. Japan has by far the lowest interest rates in the G7, a fraction of the UK's 5.5 per cent, the US's 5.25 per cent and the eurozone's 3.75 per cent.
The ongoing weakness of the yen will be discussed at this weekend's G8 meeting in Potsdam, although any action to boost the currency is highly unlikely. The three European powerhouses - Germany, France and Italy - have long complained that the weak yen is undermining their export competitiveness and handing Japan an unfair advantage.
Finance ministers are also likely to repeat their call for more flexibility in China's exchange rate, which is being held artificially low to boost exports. Hedge fund regulation is also on the agenda.
One noticeable absentee from the meeting of the world's most powerful finance ministers and central bankers will be the US Treasury Secretary Hank Paulson. The former Goldman Sachs chief executive says he is too busy with legislative work and is preparing for meetings next week with a top-level economic delegation from China. The Chancellor, Gordon Brown, will interrupt his preparations for moving into No 10 to attend.
The meeting kicks off tonight with a dinner at which the G8 will be joined by representatives from five African nations - Ghana, Cameroon, Mozambique, Nigeria and South Africa - whose heavy debt loads will be discussed.
