Relentless yen surge kept BOJ on alert in 2011, spurring easing

© Kyodo News

A heightened sense of alarm over the yen's surge to record highs prompted Bank of Japan board members to ease monetary policy in 2011 amid a nascent recovery from the shock of the massive earthquake, tsunami and nuclear crisis in the northeast of the country, the BOJ's minutes showed Monday.

The minutes of policy-setting meetings between July and December in 2011 revealed the BOJ's concern regarding the yen's persistent strength that was threatening to hurt corporate sentiment, prod manufacturers to shift production overseas and delay the nation's exit from deflation.

During that time, the government scrambled to arrest the yen's appreciation by repeatedly stepping into the currency market, as European sovereign debt woes were pushing market players to seek the Japanese currency as a relatively safe asset.

"We, as the central bank, have been clear that we are ready to take appropriate steps when necessary while carefully examining economic and price conditions. In this respect, now is the time (for action)," then BOJ Governor Masaaki Shirakawa was quoted as saying at an Aug. 4 policy meeting.

Shirakawa told other Policy Board members that the Finance Ministry had been carrying out currency interventions since earlier that day and it was "important" for the central bank to make a decision on its monetary policy swiftly to calm financial markets. At the meeting, the BOJ decided to ease policy, expanding its asset purchase program by 10 trillion yen ($87 billion) to 50 trillion yen.

The meeting was held as the U.S. dollar traded in the 76 yen zone. The yen surged to a record high of 76.25 against the dollar on March 17, a week after the massive earthquake, leading to joint currency interventions by the central banks of the Group of Seven countries.

"The biggest risk (to the economic outlook) is the yen's appreciation," said board member Hidetoshi Kamezaki, warning of its negative impact on capital spending and employment. "Japan's economy is facing a critical phase."

A strong yen serves as a headache for Japanese exporters as it cuts into their overseas profits when repatriated. On the flip side, it also makes imports cheaper and could encourage Japanese firms to go ahead with overseas mergers and acquisitions.

While some BOJ board members said additional easing should not be ruled out to address further yen gains, Shirakawa said at a Sept. 6-7 policy meeting that "it is inappropriate to take a simplistic or shortsighted approach to ease policy because of yen gains."

"Based on the real effective exchange rate, the yen is not so strong. But we hear loud screaming, especially from automakers," Shirakawa said, adding they need to shift from business models designed to benefit from a weak yen.

At its Oct. 27 meeting, the BOJ again eased monetary policy by expanding its asset purchase program by a further 5 trillion yen, with the focus on Japanese government bonds.

The decision, however, failed to stop the yen from appreciating and the Japanese currency hit a fresh record high of 75.32 per dollar on Oct. 31, triggering a record single-day currency intervention of 8.07 trillion yen by Japanese monetary authorities and subsequent "stealth" interventions in early November.

In that meeting, Shirakawa acknowledged the need for the BOJ to communicate its decision carefully to dismiss the view that stepping up Japanese government bond-buying was equivalent to debt monetization, which could unsettle the bond market and undermine investor confidence.

The then BOJ chief was quoted as saying, "This extremely accommodative monetary environment alone would not be sufficient to open the path toward an exit from deflation unless it is accompanied by efforts (by companies and other parties) to boost growth."

The BOJ releases fuller minutes of policy meetings a decade after they were held.