Japan's new finance minister called for a weaker yen on Thursday and said he would work with the Bank of Japan to achieve an appropriate level, prompting a sharp slide in the currency against the dollar.
In his first press conference as finance minister, Naoto Kan also signaled he would maintain pressure on the central bank to do more to lift the frail economy, which the government fears could slip back into recession as deflation hurts demand.
He also lived up to some expectations that he would not be as fiscally restrained as his predecessor by saying he would be open to spending more in the future if the economy weakens. He had not felt bound by fiscal austerity when the cabinet last month agreed on a budget for 2010/11, he said.
Kan saved his most direct remarks for the foreign exchange market, calling for a weaker yen and stirring speculation the government may be more inclined to stem a sharp yen rise.
Many businesses say it is appropriate for the dollar to be around 95 yen for trade, so we must work with the Bank of Japan to bring it to appropriate levels taking into account the various effects currencies may have on the Japanese economy, Kan, who is also deputy prime minister, said.
At the moment, (dollar/yen) has largely corrected to a weak yen compared with the time when the so-called Dubai shock occurred. It would be nice if the yen weakened a bit more, he said.
Kan, 63, formerly National Strategy Minister, was named finance minister on Wednesday, replacing 77-year-old Hirohisa Fujii, who stepped down for health reasons.
His job will be to steer the world's second-biggest economy back to health after it suffered its worst recession in decades during the global financial crisis.
Although growing again, the government fears a long bout of deflation, which the central bank has forecast will last at least another three years, will undermine the nascent recovery.
CHANGE OF TONE
The yen slid to 92.87 per dollar after Kan's comments from around 92.20 on trading platform EBS. The yen has come off a 14-year high of 84.82 per dollar in late November but Kan's comments reinforced expectations he would be more inclined to act against excessive yen rises.
Japan's key exports industry is slowing emerging from Japan's worst post-war recession so a weaker yen would be welcomed. Major exporters, including Honda Motor Co <7267.T>, have complained about the high levels of the yen.
It clearly would be helpful if the yen weakened a little bit so the Japanese can share in some of the robust growth that some of its trade competitors like South Korea and Taiwan have enjoyed, said Glenn Maguire, Asia chief economist at Societe Generale in Hong Kong.
Maguire, like other analysts, did not foresee that Japan would return to currency intervention -- last seen in 2004 -- but said the finance ministry's tolerance of a high yen would change under Kan.
There is clearly a change of tone that reflects the deterioration of the economic environment since the DPJ was swept to power, Maguire said, referring to the ruling Democratic Party of Japan, which won a national election last August.
Still, some economists said Kan's direct comments on Thursday reflected his lack of experience in dealing with currency policy, rather than any desire for currency intervention.
Kan is known to make sharp comments when it comes to parliamentary debate, said Satoru Ogasawara an economist at Credit Suisse in Tokyo. But it is uncertain whether he is good at communicating with markets and it may take time for markets to fully understand his ability.
Analysts said Kan's appointment brought an element of uncertainty to the Japanese government bond market which is jittery that Japan is heading for a funding crunch as public debt rises to 200 percent of GDP -- the worst among developed economies.
Analysts say Kan is less of a fiscal hawk than Fujii, who had been adamant new bond issues in the fiscal year starting April 1 should be limited to 44 trillion yen. Indeed, Fitch ratings agency had threatened to downgrade Japan's credit status if new issuance was much more than 44 trillion yen.
Kan said he hadn't thought once about fiscal austerity when the government compiled the record 92.3 trillion yen 2010/11 budget. He added that whether Japan should continue with stimulus spending would depend on how the economy fares in future.
Kan has been one of the most vocal cabinet critics of the BOJ, blasting it for taking too rosy a view of the economy and had joined other ministers in pressuring the central bank into easing its already loose monetary policy.
We must avoid a double-dip (recession) with the help of monetary policy, he told reporters.
Japan's bulging public debt means the government's room for maneuver is limited if government fears of a further economic slide materialize. But the BOJ has argued there is little it can do either since its policy rate is a lowly 0.1 percent.
Still, on December 1, a few days after Kan said the government and the BOJ would act together to stem yen rises, the BOJ held an emergency rate review and eased policy with a new scheme offering banks more short-term funds. The move drove the yen away from its 14-year high.
The BOJ will clearly be prone to more political pressure, and Kan is likely to increase pressure for more action from the central bank if the yen resumes its rise and heads toward 85 yen to the dollar again, Ogasawara said.
Kan on Thursday didn't specify what the BOJ should do but added that the government must avoid a double-dip recession in the economy by closely coordinating with the central bank.
(Editing by Neil Fullick)