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Analysis: Policy patience seen wearing thin as yen drops

An employee of a foreign exchange company walks past a monitor displaying the Japanese yen's exchange rate against the U.S. dollar in Tokyo
An employee of a foreign exchange company walks past a monitor displaying the Japanese yen's exchange rate against the U.S. dollar in Tokyo

By Vidya Ranganathan

SINGAPORE (Reuters) - The yen's fall past 100 per dollar highlights growing concerns about ultra-loose monetary policy around the globe and raises the prospect that policymakers elsewhere may take action to protect their economies from a tide of hot money.

Fears that a global currency war is brewing were fuelled when the Reserve Bank of Australia and Bank of Korea both cut interest rates this week, citing the strength of their currencies as one of the reasons to act.

New Zealand's central bank, meanwhile, confessed for only the second time since 1985 that it had intervened in currency markets, one of the few defenses against the inflows of cheap money for what is an open, but small, economy.

Korea's rate cut on Thursday was a surprise and the central bank Governor Kim Choong-soo made it clear the weakness of the yen was an issue.

Jonathan Cavenagh, a strategist at Westpac Bank in Singapore, said since the Bank of Korea decision the yen had fallen to 101.30 per dollar from 99.00. That had probably not gone unnoticed in South Korea, which competes head on with Japan in many export markets such as auto and technology.

"I can only imagine their concern level has risen a notch or two," he said.

Cavenagh reckoned Bank of Korea's worries were more around how the appreciating won would affect earnings of the country's shipbuilders and electronics exporters, rather than hot money inflows, which have been relatively subdued into that economy.

"But hot money still tends to drive currencies higher and, in an environment where export growth is slowing around the region, it will certainly be creating some headaches," he said.

FRICTION AHEAD OF G7

The yen slid to a 4-year low on Friday and has declined more than 20 percent against the dollar in the past six months as Japan Prime Minister Shinzo Abe pushed his potent mix of aggressive monetary easing and fiscal expansion.

That involved the Bank of Japan (BOJ) unveiling unprecedented monetary expansion on April 4, aiming to revive an economy that has suffered low-grade deflation and sluggish growth for 15 years.

Friday's drop in the Japanese currency was in part driven by the dollar, which was boosted by stronger U.S. data and talk the Federal Reserve, which also has an extraordinarily loose monetary policy, may begin to withdraw some of the stimulus introduced in the aftermath of the global financial.

Ahead of a Group of Seven financial leaders' meeting in Britain, BOJ Governor Haruhiko Kuroda reiterated Japan's position on Friday that its super-loose monetary policy does not target the currency. U.S. Treasury Secretary Jack Lew warned that America was watching.

"Japan has growth issues for a long period of time that we have encouraged Japan to address. So as long as they stay within those bounds of those international agreements I think growth is an important priority," Lew told the CNBC news channel in London.

"I'm just going to refer back to the ground rules and the fact that we've made clear that we'll keep an eye on that," he added.

CAPITAL CONTROLS RESISTED SO FAR

The yen was given a further push down on Friday by Japanese data showing that domestic investors had turned into net buyers of foreign bonds in the past two weeks, backing long-held expectations Abe's policies could drive capital out of the country.

Faced with inflows of capital, policymakers in emerging Asia have so far resisted outright capital controls, such as punitive taxes or investment curbs.

Money has been going into markets in Southeast Asia's high-yielding economies for months, and continues to do so despite the growing risks policymakers may take measures to counter the capital flows. Stock markets in Malaysia and Indonesia have hit record highs and in Singapore a multi-year high.

An appreciating baht has become the subject of a rare and public feud on policy between Thailand's fiercely independent central bank and its finance minister. The Philippines has had to cut a rate on special deposits it uses to manage peso liquidity, in order to moderate the inflows.

The Reserve Bank of New Zealand's governor, Graeme Wheeler, managed to knock around half a cent off the New Zealand dollar after divulging at a parliamentary committee that it had been active in currency markets, but his success may be limited.

"Until such time as the forces of global QE come to an end it is likely to be the case that the NZ dollar will remain 'overvalued', when measured according to traditional metrics," said Sean Keane of Triple-T Consulting.

"The RBNZ knows that the currency firepower that it has at its disposal would be quickly overwhelmed in any outright assault on the FX market, and large losses may accrue to the bank's balance sheet."

China may, however, have upped the ante in the battle to control hot money flows with measures it carried out last week after the yuan rose to persistent record highs against the dollar.

Regulators tightened limits on long-yuan positions that banks can hold for their own accounts and imposed limits to discourage firms from using dollar loans as a means to speculate on yuan gains.

China's State Administration of Foreign Exchange (SAFE) also said it would increase scrutiny on exporters who channel money into the country disguised as trade payments.

"To me, SAFE's response over the weekend is perhaps a hint of where we are headed," said Westpac's Cavenagh.

"Other central banks around the region may take their lead from China but, of course, they tend to have more open capital account and some of these rules may be difficult to enforce."

(Editing by Alex Richardson)

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