$100 billion fund to curb yen's rise draws skepticism

August 25, 2011

The government has announced the creation of an emergency fund worth $100 billion (7.6 trillion yen) to combat the yen's appreciation by encouraging businesses to exchange Japanese currency for U.S. dollars.

But analysts are skeptical of the measure, saying the fund is too small to have any impact on foreign exchange market trading totaling 50 trillion yen a day.

According to an announcement by the Finance Ministry on Aug. 24, the government tapped dollar reserves from its foreign exchange special account to set up the fund.

It will make low-interest loans available for one year to companies through the Japan Bank for International Cooperation. The government hopes this will spur businesses to exchange yen for dollars when they acquire foreign companies and purchase natural resources, thus leading to reducing the value of the yen.

The fund is also aimed at bolstering the strength of the Japanese economy in the long run through M&As overseas. A stronger yen makes M&A deals cheaper for Japanese companies.

It is the first time for the government to use its foreign exchange special account to help businesses buy foreign assets. Dollar reserves in the account are usually used by the government and the central bank to intervene in foreign exchange markets to stem the yen's surge.

Despite the ministry's announcement, however, the yen edged up.

A source dealing with foreign exchange markets at a leading bank said, "The government will become more convinced that (direct) intervention will be the only way to help rein in the appreciation of the yen."

The government will also establish a 100 billion yen investment fund with the private sector for small and midsize businesses to facilitate their expansion to overseas.

Tadashi Okamura, chairman of the Japan Chamber of Commerce and Industry, welcomed the step, saying it was in line with Japan's growth strategy.

Japanese companies were desperate to defend themselves against hostile foreign takeovers when the yen fetched 124 yen against the dollar in 2007.

But now it is Japanese companies that are leaping at the chance to snap up foreign assets.

"We will step up our moves to purchase attractive assets (overseas) as an integral part of our strategy," said Naoki Izumiya, president of Asahi Group Holdings Ltd., when he announced the takeover of a large beverage company in New Zealand on Aug. 18.

The purchase price was about NZ$1.5 billion (about 97.6 billion yen, or $1.27 billion). It represented a saving of nearly 50 billion yen, compared with July 2007, when the yen was weaker, at 97 yen, against the New Zealand dollar.

Kirin Holdings Co. said early this month that it will buy a majority stake in Brazil's second-largest beer company.

In May, Toshiba Corp. announced a plan to take over the world's leading electricity metering company, which is based in Switzerland.

The largest acquisition so far this year came in May, when Takeda Pharmaceutical Co. announced it will buy a large Swiss drug company for 9.6 billion euros (about 1.118 trillion yen). It was the third-largest M&A of a foreign company by a Japanese business.

The deal will allow Takeda Pharmaceutical to ramp up sales of drugs to emerging economies.

Yasuchika Hasegawa, chairman of Keizai Doyukai (Japan Association of Cooperate Executives), said M&As by Japanese companies will only increase in the future.

"For Japanese businesses to grow, the only option will be setting up operations in emerging markets as the nation's economy has been mired in a slump," he said.

But Megumi Hosonuma, an analyst at Mizuho Research Institute, said companies could become more cautious about takeovers, depending on the outlook of the U.S. and European economies.

This article was written by Takashi Fukuyama and Kazuo Teranishi.

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Naoki Izumiya, president of Asahi Group Holdings Ltd., announces acquisition of a New Zealand beverage company on Aug. 18. (The Asahi Shimbun)

Naoki Izumiya, president of Asahi Group Holdings Ltd., announces acquisition of a New Zealand beverage company on Aug. 18. (The Asahi Shimbun)

  • Naoki Izumiya, president of Asahi Group Holdings Ltd., announces acquisition of a New Zealand beverage company on Aug. 18. (The Asahi Shimbun)

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