Japan sets $100B to manage strains of strong yen

[August 24, 2011]  TOKYO (AP) -- Japan's government on Wednesday unveiled a $100 billion loans program to ease the strains of a strong yen and encourage companies to turn adversity into opportunity.

The unconventional one-year scheme aims to prompt Japanese companies to shift their yen holdings into foreign currencies and spur overseas mergers and acquisitions. It came coupled with a new rule requiring major financial firms to report their currency trading positions through the end of September.

The emergency steps represent the latest attempt by the government to wrestle with a Japanese currency that it fears is undermining the country's export-driven economy and recovery from the March 11 earthquake and tsunami.

"I hope this will help to address the one-sided strength of the yen," Finance Minister Yoshihiko Noda told reporters, according to Kyodo News agency.

A strong yen erodes the value of exporters' profits when brought back to Japan and pushes up prices of their goods overseas. Officials also worry about job losses at home as companies move production out of Japan to insulate themselves from the rising yen.

The finance ministry intervened in currency markets earlier this month as the yen flirted with record highs against the dollar. The impact proved to be short-lived. Last week the dollar fell under 76 yen, which was a new post-World War II high for the Japanese currency.

Through the program, the government will send foreign currency reserves to the Japan Bank for International Cooperation. The state-operated bank, known as JBIC, would then extend loans to commercial banks so they can help companies with overseas investments and secure natural resources.

While a strong yen saps overseas earnings, it also makes potential acquisitions outside of Japan less expensive.

Japanese companies have embarked on an aggressive global shopping spree as a result. Recent data from Dealogic shows that the value of overseas takeovers and acquisitions by Japanese firms in 2011 has more than doubled from a year earlier.

Asahi Group Holdings Ltd. last week agreed to buy New Zealand beverage maker Independent Liquor Ltd. in a deal worth $1.2 billion. Just weeks earlier, rival Kirin Holdings Co. said it would buy Brazilian brewer Schincariol Group for $2.5 billion in one of the largest overseas takeover bids by a Japanese company this year.

JBIC will separately funnel 150 billion yen ($1.96 billion) of its own money to the program.

The second prong of the government's efforts is an attempt to limit speculation that officials suspect might be fueling sharp swings in the yen. Finance Minister Yoshihiko Noda has said repeatedly in recent weeks that the yen's moves are unbalanced and suggested that the government would act against speculators seeking short-term profits.

The central bank released a brief statement in support of the finance ministry's measures, saying they will "contribute to the stability of the foreign exchange market."

"The Bank of Japan will continue to carefully monitor the effects of developments in the foreign exchange market on the future course of economic activity and prices," it said.

Economists, however, expressed skepticism.

Junko Nishioka, chief economist at RBS Securities Japan, described the steps as "not straight forward."

She questioned the government's decision to focus on mergers and acquisitions overseas at a time when Japan needs help sustaining production at home.

"The most critical issue the Japanese economy has at this moment is a risk of a hollowing out" of industry, Nishioka said in a report to clients.

"We believe today's decision is unclear and will have little impact to alleviate the yen's appreciation pressure," she said.

[Associated Press; By TOMOKO A. HOSAKA]

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