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BoJ leaves yen to surge
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September 21, 1999: 7:35 a.m. ET
Dollar dips 2% as Japan central bank leaves monetary policy intact
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LONDON (CNNfn) - The Bank of Japan sent the yen soaring by 2 percent in currency markets Tuesday after refusing to bow to pressure to loosen its monetary policy, reawakening concerns about Japan's nascent economic recovery.
The yen had softened over the past week amid expectations that the central bank would boost either domestic liquidity or intervene directly in the market under pressure from Japan's Ministry of Finance.
However, the bank's policy committee voted to leave its monetary policy unchanged, and traders responded by cutting down the dollar's value by almost 2 yen to 104.60 yen. The euro also lost around 2 yen to trade below 109.
The announcement Tuesday came less than two weeks after the Bank of Japan, under heavy pressure from politicians nervous about the strong yen's impact on Japan's fledgling economic recovery, spent $2 billion in the currency markets swapping dollars for yen.
Currency traders said the yen was back on track to head for a pre-intervention level of around 103 against the dollar.
The Ministry of Finance has been keen for the central bank to help reflate the economy by easing monetary conditions, though nominal interest rates are already close to zero.
"The bank has stuck with its zero interest rate policy and that is likely to go down like a lead balloon with the ministry," said Jeremy Hawkins, international economist at bank of America in London.
Though the world's second-largest economy has surprised observers with strong growth in the first two quarters of the year, the expansion is expected to run out of steam unless the government pumps more money into state-sponsored public works schemes.
Hawkins said the bank's reluctance to bow to political pressure reflected traditional central bank concerns to maintain credibility and independence.
However, the lack of even a symbolic move by the independent central bank leaves Japanese policy makers in a weak position ahead of this weekend's G-7 summit of global economic leaders.
The yen's rise had been halted temporarily by expectations of concerted intervention by Japan and the United States after rising 14 percent since July. Strategists are now discounting any joint move.
The bank also rejected other possible policy measures, notably the purchase of short-term government bonds and dropping the "sterilization" of foreign exchange intervention --which occurs when the bank removes an equal amount of cash from the system as it buys dollars for yen.
"The BoJ is making no meaningful concessions to its critics at home or abroad," said Stephen Lewis, chief economist at Monument Derivatives in London.
Tokyo's benchmark Nikkei 225 index actually climbed 2 percent Tuesday on expectation of a central bank initiative announcement after the market close. Export-sensitive stocks had fallen as the yen appreciation eroded their international competitiveness, and their tentative recovery threatens to grind to a halt as the currency's strength revives.
The expectation is that the government will be forced to unveil a large supplementary budget package to maintain the economy's momentum. "To a significant extent, the recovery in Japanese business activity depends on confidence factors," said Lewis. He said the absence of central bank support now placed the burden of further recovery firmly with the Ministry of Finance.
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