Japan has intervened in the foreign-exchange market for the first time since 2004 after a surge in the yen to the strongest against the US dollar in 15 years threatened to stunt the nations economic recovery.

Finance Minister Yoshihiko Noda confirmed the intervention, speaking to reporters today in Tokyo.

Mr Noda said that Japan had contacted other nations about the step, without specifically saying that todays measure was taken unilaterally.

The yen tumbled 1 per cent to 83.97 per US dollar. Japans currency reached a high of 82.88 earlier today. The benchmark Nikkei 225 stock average jumped 2 per cent on the news, reversing earlier losses.

Advertisement

The yen also weakened against the Australian dollar, dropping to a five-week low. The dollar leaped 1.4 per cent to 79.10 yen after traders spotted the Bank of Japan selling yen in the market in an effort to restrain its export-sapping strength.

Overnight, the dollar soared to its highest since the global financial crisis against the greenback, hitting 94.57 US cents, before falling back below 94 US cents in trading today.

Japan’s currency market intervention comes a day after Prime Minister Naoto Kan won reelection as the head of Japans ruling party, beating a candidate who had specifically called for intervention to help shelter the nations exporters from currency appreciation.

Exports have been the main driver of Japans economic recovery and the yens jump prompted business leaders to call for stronger steps from the government to stem the gains.

Politically, its more stable than before the party election and that may make it easier to conduct intervention, Tohru Sasaki, head of Japan rates and foreign-exchange research in Tokyo at JPMorgan Chase said before the announcement.

Mr Kan’s government has been trying to talk down the yen but until Wednesday had stopped short of intervening in the markets, apparently worried that acting without Group of Seven partners would not be very effective.

There were views in the market that Kan was more tolerant of a higher yen and the yen rose after he won the ruling party leadership vote yesterday, said Yasuo Yamamoto, senior economist at Mizuho Research Institute.

The government probably wanted to stamp out those views. But the question is: Will the yen stop rising from here? It’s not clear.

Last time Japan intervened in the foreign exchange market, it embarked on a 15-month, 35 trillion yen selling spree aimed at preventing a strong yen from snuffing out an economic recovery.

Analysts said it was unlikely that other countries would help Japan tamp down the yen since they also need weaker currencies to boost exports and help their own fragile economic recoveries. Some doubted that Japan would be as aggressive as earlier in the decade.

The amount of intervention isn’t likely to be as much as Japan was spending the last time it intervened, so it won’t be enough to stop dollar/yen from falling. It is also unlikely that other countries will cooperate, said Junya Tanase, currency strategist at JPMorgan in Tokyo.

The yen had surged to its highest against the US dollar since 1995, as low US interest rates have made the dollar cheap to borrow and sell for higher-yielding assets and as talk has resurfaced that the Fed might consider buying more assets to support the economy.

The Japanese currency’s rise has brought it closer and closer to its record peak of 79.75 per US dollar set in 1995. The euro rose 1.8 per cent to 109.85 yen.

Japan is not the only developed economy to have intervened to weaken its currency in the past year.

The Swiss National Bank intervened to hold the Swiss franc down against the euro, in a move launched in March 2009 as part of a package of steps to fight deflation risks.

Reuters, Bloomberg