Japan's bold strike to weaken its currency on Wednesday sent the yen tumbling more than 3.0 percent against the U.S. dollar, but unsettled allies who feared the unilateral move may complicate efforts to restore balanced global economic growth.
Japan unleashed waves of yen selling, estimated at more than $20 billion (12.8 billion pounds), which spread from Tokyo through New York trading. The sales, conducted alone without help from its Group of Seven partners, are expected to continue in the days ahead, Japanese news agency Nikkei reported.
Japan's first intervention in global currency markets in six years was not a complete surprise given that officials had tried to talk down the currency in recent weeks after it hit a 15-year high against the dollar.
But the timing and go-it-alone approach drew criticism. A top European official said coordinated action was a more effective means of adjusting exchange rates. And as the U.S. Congress began hearings on China's currency policy, a U.S. lawmaker called Japan's move "deeply disturbing."
Doubts remained though about how effective Japan's unilateral yen selling spree might be. A 15-month solo effort by Switzerland which ended earlier this year did little to tame the Swiss franc.
Like Japan, most advanced economies are grappling with slow growth at home, making exports an economic imperative. Japan's move heightened concerns that countries would launch a round of competitive devaluations to give their own exporters an edge.
U.S. lawmaker Sander Levin, who chairs the congressional committee examining China's currency policy, blamed Beijing for Japan's "deeply disturbing" intervention. Levin and many other U.S. lawmakers say China keeps the yuan artificially low, boosting its exports at the expense of U.S. companies.
"What's happening is that China's actions have affected Japan, and now Japan's actions affect us," he said.
Andrew Busch, global currency strategist at BMO Capital Markets in Chicago, said Japan's move would make it more difficult for Congress to get its message through to China.
"How can the Japanese get a pass to intervene when the Chinese are being criticized for essentially the same activity?" he said.
Some emerging markets were also wary of losing out in a beggar-thy-neighbour round of devaluations. Brazilian Finance Minister Guido Mantega said he would not sit on the sidelines "watching the game" while other countries weakened their currencies at the expense of Brazil.
"We're going to take appropriate measures to stop the real from appreciating," Mantega said in Rio de Janeiro.
The EU offered some sympathy for Tokyo's plight, saying too rapid yen appreciation could threaten economic recovery, but a top official said coordinated action would have been better.
"Unilateral actions are not the appropriate way to deal with global imbalances," Jean-Claude Juncker, chairman of the Eurogroup of euro-zone finance ministers, said when asked about Japan's intervention.
U.S. officials at the Federal Reserve, White House and Treasury declined to comment.
After this week's victory in a party leadership contest, Japanese Prime Minister Naoto Kan appeared to be stepping up efforts to wrench the country out of deflation by targeting the yen's strength which has weighed on stock prices and corporate profits.
The Japanese Prime Minister told reporters that Wednesday's intervention had some effect but the government was watching foreign exchange moves with a sense of urgency.
Aside from apparently acting alone, Japan faces the stiff task of trying to weaken the yen while other major central banks such as the U.S. Federal Reserve mull more steps to ease monetary policy, which could weigh on their currencies.
The dollar rose to 85.72 yen from its 15-year low beneath 83 yen, its biggest daily gain in nearly two years. It was last up 3.1 percent at 85.60 yen.
The Japanese currency's rise had brought it closer to its record peak of 79.75 per dollar set in 1995, squeezing exporters' profits, but Wednesday's yen drop helped push Tokyo stock market's Nikkei average up 2.3 percent.
It also pleased Japanese exporters, many of whom had expected the yen to average 90 per dollar this fiscal year.
"We applaud the move by the government and the Bank of Japan to correct the yen's strength," Japan's No. 2 automaker Honda Motor Co said in a statement.
Honda has pencilled in 87 yen per dollar in its estimates for the fiscal year to March 2011.
Billionaire financier George Soros said Japan was right to act to bring down the value of the yen.
"Certainly, they are hurting because the currency is too strong so I think they are right to intervene," Soros said at a Reuters Newsmaker event.
Japanese Finance Minister Yoshihiko Noda, who will reportedly keep his post after a cabinet reshuffle, indicated Tokyo acted alone. Noda said he was in contact with authorities overseas, and analysts expected Japan to be spared international criticism.
Unlike previous forays, the Bank of Japan will not drain the money flowing into the economy as a result of the yen selling, sources familiar with the matter said.
That indicated the central bank plans to use the sold yen as a monetary tool to boost liquidity and support the economy.
Authorities that sell their own currencies to weaken them often issue bills to "sterilise" the funds and keep the excess money from becoming inflationary. In Japan's case, it wants to promote inflation since the economy has been dogged by deflation for much of the past decade.
(Reporting by Tokyo newsroom; Additional reporting by Tara Joseph Hui in Hong Kong, Doug Palmer and Paul Eckert in Washington; Writing by Kevin Plumberg and Emily Kaiser; Editing by Mike Peacock and Neil Stempleman)