Japan on Monday signaled it was ready to continue intervening in the currency market in the wake of a G7 agreement to counter excessive exchange-rate moves, but Moody's Investors Service warned that Tokyo's efforts to weaken the yen were ineffective and negative for its sovereign ratings.
Japan's solo currency intervention and monetary easing last week initially pushed the yen lower against the dollar but the effect proved short-lived, a negative for Japan's fragile economic recovery and its credit rating, Moody's said.
Yen strength has eroded the competitiveness of Japan's exports and hampered the economy's ability to sustain its recovery from the 2009 global recession, the rating agency said in a statement.
Moody's announcement came hours after Group of Seven finance leaders signaled their readiness to take coordinated action against excessive and disorderly currency moves.
Last week Japan sold 4.6 trillion yen ($59 billion) in the currency market and has indicated it is ready to sell more to stem sharp rises in the yen.
We will continue to carefully monitor market moves. We also confirmed the G7 stance on currencies, Noda told reporters after the emergency G7 phone meeting on Monday.
He did not comment on whether they discussed the possibility of joint currency intervention to support the dollar, but said Japan asked its G7 counterparts for their statement to make a clear mention of issues related to the currency market.
Noda also said that market trust in the dollar and U.S. Treasuries has not wavered in the wake of a U.S. credit downgrade, indicating Tokyo's readiness to maintain its massive holdings of U.S. government bonds.
In a statement issued after the conference call, the G7 said they will consult closely on actions in exchange-rate markets and cooperate as appropriate.
Japan explained to its G7 counterparts that Tokyo's currency intervention last week was aimed at checking speculative and disorderly market moves, Noda said.
Bank of Japan Governor Masaaki Shirakawa also attended the conference call.
BOJ TO KEEP FX INTERVENTION UNSTERILISED
The G7 call was arranged after worries of another U.S. recession and concern about the euro zone debt crisis sparked a global stock market slump that wiped $2.5 trillion off companies' values in the past week.
On the assumption that the United States will take steps to restore its finances, I believe confidence in U.S. Treasuries has not been shaken. They remain an attractive (investment), Noda said.
Japan held $912 billion in U.S. Treasuries as of May 2011, second only to China's $1.16 trillion in holdings, according to the U.S. Treasury Department.
Japanese authorities intervened in currencies and the central bank eased monetary policy last week to ease pressure on the export-reliant economy after the yen surged close to a record high, as investors bought it as a refuge from the fiscal and economic woes in Europe and the United States.
The central bank will refrain from draining funds that entered the market through last week's yen-selling intervention, a BOJ source said on Monday, thereby amplifying the effect of currency intervention and monetary easing.
The BOJ has so far skipped money market operations to offer funds to the market but is ready to pump huge amounts of liquidity into the banking system on any signs of stress in the money markets.
We're closely watching market moves and are ready to offer funds anytime when necessary, the source told Reuters.
Borrowing costs have stayed very low in Japan despite market jitters over debt woes in the United States and Europe, due in part to the central bank's aggressive monetary easing.
($1 = 78.490 Japanese Yen)
(Additional reporting by Rie Ishiguro and Leika Kihara; Writing by Leika Kihara; Editing by Nathan Layne and Edmund Klamann)