Dramatic Surge in Japan’s Yen Spurs New Fear

Japan, famous for its long-standing willingness to tackle “disruptive competition” and smooth out capitalism’s rough edges, is getting whipsawed by the very market forces it has tried so hard to control.

In the last two days, Japan’s currency appreciated by as much as 15% and the Nikkei stock index posted its best and worst days of the year.

“I’ve never seen anything like it, it’s astounding,” said Charles Lambert, analyst with Jardine Fleming Securities Asia Ltd. “The market is hyper, manic-depressive.”

To be sure, the wild swings have been fueled partly by “technical” trading blamed on speculators who got caught on the wrong side of yen and the Nikkei when both began to rally.

“The stock market’s reaction was a bit extreme in both directions,” said Jason James, chief strategist at HSBC Securities, noting the Nikkei’s 6.2% surge on Wednesday, then 5.8% plunge on Thursday, to 13,026.06. “[And] people don’t know how to react to the yen.”

But analysts say Japan’s markets also are reflecting investors’ desperate search for some sign that this nation’s planners are tackling deep-seated problems in the banking sector and the broader economy.

And behind the markets’ dramatic graphs and bar charts is growing concern over the cost this new roller-coaster ride is exacting on Japan’s real economy.

The only reasonably bright star in Japan’s economic universe--its exporters--have seen their global competitiveness fall by about 20% in less than 60 days even as their primary targets, U.S. and European consumers, show growing signs of cash-register exhaustion.

When the yen was at an eight-year low of 147 to the dollar on Aug. 11, the fear was that it might melt down to 200 if investors lost all hope that Japan could right its deeply troubled economy and financial system.

Now, suddenly, the yen is at 119, and on Thursday it strengthened to as much as 111 in U.S. trading.

“If this exchange-rate level is sustained, the trade sector will be badly hurt,” said Russell Jones, chief economist with Lehman Bros. Japan. “My fear is that the appreciation of the yen will make life a lot harder for Japan.”

Of course, there are important pluses to a stronger yen, including greater purchasing power for Japanese and more lending flexibility for Japan’s beleaguered banks.

Japan also recognizes that its prospective loss of export competitiveness in everything from VCRs to automobiles is Asia’s gain, because it makes the products of South Korea, Thailand and other hard-hit countries cheaper relative to Tokyo’s products in overseas markets.

And Japan has worked hard in recent weeks to show the world that it has the rest of the region’s welfare at heart--including a proposed $30-billion aid package it recently unveiled for Asian nations.

But at the end of the day, every country is more concerned with its own welfare than that of its neighbors. From that perspective, the currency news of the last few days has been disheartening here, playing into a growing feeling that this year’s economic fall down the rabbit hole may never end.

The Dai-Ichi Life Research Institute estimates that for every 10 yen that Japan’s currency appreciates against the dollar, the nation’s economic growth rate is reduced by half a percentage point.

Already, Japan’s economy is projected to shrink anywhere from 1.8% to 2.5% this year.

The growing gloom hit home Thursday as the shares of some of Japan’s biggest export companies led the Nikkei’s reversal. Honda Motors, for one, fell by a record 13% to about $28 in Tokyo trading.

At midday today the Nikkei was off 32.97 points at 12,993, while the yen was at 116 to the dollar.

Japanese government officials, after talking up the currency for weeks, are now in back-and-fill mode as they try to jawbone the yen back in the other direction.

Analysts said the run-up was partly an overreaction, fueled by panicked yen purchases by “hedge funds” and other traders that had been “short” the currency, meaning they expected it to continue to slide.

“It’s a clear case of overshooting,” said Ron Bevacqua, economist with Merrill Lynch Japan.

As investors reassess the relative strength of the U.S. economy versus the Japanese economy, the yen should weaken again, back to the 130 level, some analysts say.

Bank of Japan officials voiced their view Thursday that the yen rise was too sharp given Japan’s economic fundamentals. The nation’s influential Keidanren chamber of commerce and industry then added its voice to the policy confusion with a call for the government to “just do something” about the currency volatility.

If only it were that easy, Japan’s bureaucrats and politicians must be thinking, as they survey currency markets that view their policy efforts with jaundiced eyes, a monetary policy that is all but ineffective and a string of stimulus packages that have failed to stimulate much of anything.

Gone are the days when Japan could dip in and buy enough shares to push up its stock markets, when bureaucratic guidance over domestic competition prevented small companies from going bankrupt, when import restrictions didn’t leak like a sieve and when the nation’s economy was still small enough to avoid the nagging glare of global responsibility.

One thing’s for sure. It’s not going to get easier any time soon.

“The government can’t relax,” said Tamotsu Sonezaki, economist at New Japan Securities. “The market will likely fluctuate for a while.”

Etsuko Kawase in The Times’ Tokyo bureau contributed to this report.