May 3, 2004
By Barney Jopson and David Ibison in Tokyo

Japan's mammoth effort to curb the strength of the yen was abandoned in April when authorities ceased intervening in the currency markets for the first time in seven months.

The finance ministry said it bought no dollars last month, having spent Y15,200bn (115bn, $137bn, £77bn) on intervention so far this year, including a monthly record of Y7,150bn in January and about Y20,000bn last calendar year.

The decision to end intervention sends out a strong message that Japanese policymakers believe the country's recovery from a decade of deflation is broadening from exports to domestic sections of the economy.

It also promises to remove a growing source of tension with the US, where manufacturers have accused the Japanese government of keeping the currency artificially low to boost exports.

However, the decision to halt purchases of US-denominated assets could have negative implications for US Treasury bonds, which have been boosted by strong buying from Asian governments, led by Japan and China.

At the start of last month the yen rose to a four-year high of Y103.4 against the dollar but has since weakened to Y110.2, partly due to an improving outlook on the US economy.

The record Y35,000bn intervention campaign began in January last year as the authorities tried to prevent a stronger yen from strangling the export growth that has sparked a broader economic recovery.

Since then, there have been growing signs that the recovery is broadening away from being purely export led. It may, if it continues, feed through to consumer spending, which accounts for about 60 per cent of Japan's gross domestic product.

Unemployment figures out last week showed the jobless rate in March dropped to 4.7 per cent from 5 per cent in February, its lowest level for three years.

The news came just days after the Bank of Japan issued a report on the state of the economy, saying "somewhat firm" household spending was "anticipated to recover at a moderate pace".

Japan's economic upturn produced annualised growth of 6.4 per cent between October and December and has been driven by exports and related business investment.

Commenting on when the Japanese economy could pull out a decade-long deflationary phase, Toshihiko Fukui, governor of the Bank of Japan, said yesterday: "It could be expected to happen later in the current fiscal year to the next fiscal year. But it is too early to speculate on the timing" because the economic situation is always changing.

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