The government and the Bank of Japan have few policy options to deal with the yen's rise and sinking stock prices caused by concerns about the U.S. and European economies.
The government and the Bank of Japan have few policy options to deal with the yen's rise and sinking stock prices caused by concerns about the U.S. and European economies.
The government will have no choice but to rely on foreign exchange market interventions to stem the yen's appreciation.
Finance Minister Yoshihiko Noda has said the government plans to include measures to prevent a hollowing out of the industry in a third fiscal 2011 supplementary budget.
But the extra budget is not expected to be submitted to the Diet until the end of September, at the earliest, because it will be compiled under Naoto Kan's successor as prime minister, if he steps down as promised.
Japan's foreign exchange market intervention on Aug. 4 was estimated to be more than 4 trillion yen ($51.01 billion), the largest on record. The previous high was more than 2 trillion yen in September.
The government plans to continue interventions when necessary.
"We will continue to closely watch market movements," Noda said at a news conference on Aug. 5. "We will respond in an appropriate manner."
In 2003, when the yen rose due mainly to the Iraq War, the government spent 35 trillion yen on currency interventions.
The government might have to fight a protracted battle to contain the value of the yen because the yen is again strengthening due to external factors.
Stock prices have plunged globally, which could dampen corporate investment in plants and equipment as well as consumer spending.
A slowdown of the U.S. economy could deal a particularly serious blow to Japanese companies.
Kaoru Yosano, minister in charge of economic and fiscal policy, said the government should consider a comprehensive economic package.
"We need to implement policies to keep the global economy from being enveloped with pessimism," he said Aug. 5.
The BOJ decided to ease monetary policy at a Policy Board meeting on Aug. 4, but a senior BOJ official said the central bank cannot afford to be taking a break.
BOJ officials are concerned that U.S. Federal Reserve officials may indicate a quantitative monetary easing policy at its Federal Open Market Committee meeting on Aug. 9.
Monetary easing is expected to prop up stock prices, but lower interest rates would lead to sales of the dollar.
An economist at SMBC Nikko Securities Inc. said the BOJ will face pressure to ease monetary policy further if the yen strengthens against the dollar.
Industry executives are concerned not only about the yen's appreciation, but also about the worsening of the global economies.
In the United States, new vehicle sales from May to July fell below expectations at the beginning of the year.
"The U.S. market is a pillar as important as emerging economies," said Takahiko Ijichi, director at Toyota Motor Corp. "Consumer spending is in a severe situation and is not expected to pick up any time soon."
Koji Fujiwara, primary executive officer at chemical maker Asahi Kasei Corp., said the global economic outlook is uncertain.
"The debt problems of the United States and Europe and risks of inflation in emerging economies are occurring simultaneously," he said. "We cannot tell what lies ahead as if we were on a summer mountain shrouded by fog."
Many executives said turmoil in global economies could affect the domestic economy.
"When Lehman Brothers collapsed, wealthy consumers tightened their purse strings," said a senior official at a major retailer. "We are concerned how (changes in overseas economies) will affect the currently stable consumption."