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Japan pursuing weak yen policy { August 27 2003 }

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August 27, 2003
Japan Is Spending Heavily to Pursue a Weak-Yen Policy

The Japanese government is defying the logic of the foreign exchange market by keeping the yen from rising sharply in value against the dollar.

The dollar has had a lot going against it this year, including strong doubts about the strength of the economic recovery, the lowest interest rates in 45 years and the war in Iraq and its aftermath. But while these concerns helped send the euro and other major currencies much higher against the dollar, the yen has not even left the launching pad.

By spending trillions of yen to buy dollars in the foreign exchange market, Japan has limited the yen's rise against the dollar this year to no more than 2.3 percent, while the euro has jumped as much as 13.5 percent. The yen is now up just 1.3 percent against the dollar while the euro is up 3.8 percent, almost three times as much.

Japan's success in keeping the yen from gaining significant strength against the dollar and other currencies is helping the country's economy rebound by keeping its exports more competitive abroad. But, at the same time, it is a drag on American economic growth and is making it more difficult for the United States to reduce its troublesome current account deficit, which is now over $500 billion.

While Japan is one of the world's major industrial economies, the government's effort to manage the value of its currency is more reminiscent of a developing economy like China, which pegs its currency to the value of the dollar.

"The yen is a one-sided floating currency," said David Gilmore, a partner in Foreign Exchange Analytics. "It can only float lower."

C. Fred Bergsten, director of the Institute for International Economics in Washington, said a former top Japanese finance official had told him that without the government's intervention, the exchange rate would be around 105 yen to the dollar, which would make the yen almost 12 percent stronger against the dollar than the current rate of 117.26.

What makes Japan's success all that more surprising, according to foreign exchange traders and analysts, is that speculators and others in the currency market usually make it impossible for governments to manage a free-floating currency over an extended period unless it is backed with changes in economic policy.

Britain was defeated by speculators in such an effort in 1992, when George Soros, the legendary hedge fund operator, was said to have made $1 billion from trades involving the pound. The currency crisis of 1997 was aggravated by speculators betting that countries like Thailand would not be able to continue to manage their currencies' value.

In addition, a recent surge in the Japanese stock market, where the Nikkei 225 index is up 36 percent since the end of April, is attracting foreign investors, whose purchases of yen should strengthen the currency.

But Japan has been successful by being aggressive, intervening in the market on 34 days through the end of June, the latest daily data available, and spending almost 9 trillion yen to buy approximately $75 billion, effectively stalling the rise of the yen and the fall of the dollar. (Another 179 billion yen was used to buy euros.)

This persistent intervention, which through July is only 1.4 trillion yen short of the 10.4 trillion yen worth of interventions over the previous three years, has basically scared off the hedge funds and other speculators who would be betting now on a rise in the yen and a fall in the dollar, just as they have bet this year on a rise in the euro.

"It has caught people off guard and people are just staying away," said one top foreign exchange executive about speculating on the yen. Officials in the Ministry of Finance in Japan, he added, "have sent deliberate messages to us to tell our hedge fund clients and proprietary trading desks not to speculate on the yen."

Japan's success is also based on the acquiescence of the Bush administration, which has not complained publicly about the negative effect of a weaker-than-should-be yen on American car and other manufacturers. If the yen strengthened, it would make Japanese exports more expensive here and, therefore, less competitive.

Rick Wagoner, the chairman of General Motors, has not been reticent, however. In a May speech, he referred to the difficulty of competing with Japanese companies "due to active intervention to keep the Japanese yen weak, versus the U.S. dollar."

As part of an effort to assuage governors and manufacturers who say that Chinese imports are undermining American business and costing jobs, the administration is pressing China to let its currency, the yuan, rise in value against the dollar. Because it is now pegged to the dollar it moves with the dollar and keeps its competitive advantage. A stronger yuan would cut into that advantage.

In last week's announcement of Treasury Secretary John W. Snow's visit to Japan and China next week, the Treasury Department said that "exchange rate issues" would be discussed during the visit to Bejing. But there was no mention of exchange rate issues in the description of the agenda for the meeting in Tokyo.

When asked about the statement yesterday, Tony Fratto, a Treasury spokesman, said, "Currency issues will be discussed in Japan, as well."

In an interview Monday, John Taylor, under secretary of the Treasury for international affairs, told Reuters that "there's no reason why recovery in Japan, in the sense of a sustainable rate of growth in the 2 to 3 percent area, should have any particular effect on the yen."

Referring to this comment, David Puth, global head of foreign exchange at J. P. Morgan, said, "It is apparent that the United States is reasonably comfortable with Japan's actions and is appropriately sensitive to the fragility of the Japanese recovery."

Mr. Gilmore of Foreign Exchange Analytics also said there was "some complicity here from the Bush administration" because the huge reserves of dollars the Japanese have built up during the intervention have been used to buy billions in Treasury securities; that has helped to slow the recent surge in interest rates here as the economic outlook improved. Other analysts said that Japan's support of the war in Iraq was also a reason for the lack of a response from the Bush administration.

But while Treasury officials have not complained directly so far, Mr. Snow has said that exchange rates should be set by the market. Analysts said this turn of phrase meant that the administration would accept a weaker dollar over all, and that it would like the Japanese to allow the yen to find its own value.

Another reason for the success, said Larry Kantor, the global head of market strategy at Barclays Capital, is that it is easier for a central bank to weaken its currency or keep it from getting much stronger than to push a falling currency higher.

In Japan's case, the Bank of Japan can use an essentially unlimited supply of yen to buy dollars, limiting the yen's climb. But to make the yen stronger, Japan would have to use its dollar reserves to buy yen. Although Japan's foreign currency reserves are formidable, they have a limit and that makes a strengthening much harder to accomplish.

Copyright 2003 The New York Times Company

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