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Imf director endorses tokyo yen intervention { February 25 2004 } Original Source Link: (May no longer be active)
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IMF director endorses Tokyo yen intervention
By David Pilling in Tokyo
Published: February 25 2004 11:50 | Last Updated: February 25 2004 13:25
Japan was right to intervene massively in the foreign exchange markets, a "pragmatic" policy that had helped the economy and the fight against deflation, Horst Köhler, managing director of the International Monetary Fund, said Wednesday.
In remarks that are likely to intensify debate over Tokyo's unprecedented and controversial levels of foreign exchange intervention, Mr Köhler said: "It is pragmatic and helps stabilise the financial system and battle deflation."
After a series of meetings with government officials in Tokyo, he said: "My understanding, confirmed in discussions with the finance minister, is that the option was taken because of the limited number of options to avoid spiralling deflation, to secure the integrity of the financial system - and it worked."
Last year, Japan spent about $185bn - about twice its trade surplus and three times the previous record - to prop up the dollar and arrest the yen's appreciation. The policy has been seen as aimed largely at helping exporters, who are leading Japan's economic recovery. However, Mr Köhler suggested it was also playing an important role in monetary policy. Japan has been steadily printing money to buy foreign currency bonds.
Japan's huge intervention, strongly supported by big business, especially car manufacturers, has been criticised by some senior government officials. They argue privately that Japan may be storing up trouble by acquiring huge dollar assets that are falling in value.
In an interview on Wednesday, Shintaro Ishihara, governor of Tokyo and an outspoken critic of the government, said intervention was aimed at helping the US, not Japan. Some academics have argued that Japan's massive purchase of US treasuries has played an important role in keeping US interest rates low and financing its twin current account and fiscal deficits. "Japan is the US's financial slave," Mr Ishihara said.
The US has been unusually shy about criticising Japanese intervention, aiming its rhetoric instead at China's fixed exchange rate. Mr Köhler, whose support for Japanese intervention also contrasted with his call for flexibility on exchange rates from China, described Tokyo's policy as "temporary and not based on a fixed foreign exchange rate target."
Richard Jerram, economist at ING, said the IMF chief's remarks were uncharacteristically partisan. "It's unusual for the IMF to take sides on a fairly controversial issue like this."
Akio Mikuni, a private economist, said intervention was doomed to fail. "If we continue to weaken the yen and try to export out of our problems, we are merely building up dollar holdings and sending our purchasing power to the US," he said.
Most of Japan's $741bn of reserves, the world's largest, were parked in US treasuries, dead assets that could never be repatriated, he said. "If we tried to sell dollars, the yen would dramatically appreciate. Technically we could do it, but economically it's impossible."
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