Japanese policy losing currency
as US runs out of patience
By Joanne Gray and Tony Boyd
The strong US dollar policy of the past four years is
under strain after the greenback yesterday suffered its
worst fall against the yen in five months and left the Bank
of Japan with virtually nothing to show for its $US25
billion, six-week intervention in foreign currency markets.
The sharp fall in the $US against the yen and the euro
comes at a time of discord between the US and Japan
over economic policies and foreign- exchange
intervention.
The renewed strength of the yen occurred just two
weeks after the new US Treasury Secretary, Mr
Lawrence Summers, took up his post and promptly
issued a stiff rebuke to Japan not to rely on a weaker yen
and currency manipulation as a tool to make exports
more attractive and propel its economic recovery.
The $US slid sharply against the yen and euro on
Monday in US trading, as investors became emboldened
by the Bank of Japan's absence from currency markets
where it had been intervening since June to halt the yen's
move above ¥117 to the dollar. The dollar fell as much
as ¥3 to ¥117.65 on Monday in US markets, compared
with Friday's levels of near ¥120.25, and in early
European trading last night was at ¥118.37 after briefly
touching ¥119.
The euro rose to a high of $US1.039 last night from
$US1.012 earlier, but fell against the yen.
The Australian dollar came under heavy selling pressure
yesterday, losing more than three-quarters of a US cent
and at one stage falling almost 4 per cent against the yen
from ¥80 to ¥77.
The BOJ, often via the European Central Bank, has
spent an estimated $US25 billion in the past six weeks
buying US dollars. The ECB is concerned at the
weakness of the euro against the dollar.
With the US trade deficit running at an annual rate of
about $US230 billion, the US has refused to collaborate
with the ECB and the BOJ to weaken the yen.
The US has also toughened its approach to Japanese
policy makers because of their failure to lift the economy
out of its decade-long recession.
The New York Federal Reserve turned down a request
from the Japanese Ministry of Finance to enter the
market to buy dollars to curb the resurgent yen, the
Nihon Keizai Shimbun reported late last week. "The US
currency authorities were said to have flatly refused," the
newspaper said.
That was swiftly followed by a public warning from Mr
Summers that Japan concentrate on stimulating
demand-led growth rather than "manipulating" its
currency which alone could not restore Japan's economic
fortunes.
"Manipulating currencies is not the approach that leads to
long-term prosperity," he said in a television interview.
Other than a brief and ineffective appearance to buy the
dollar late last week, the BOJ seems to have withdrawn
from the market, suggesting that his blunt criticism has
had an impact on Japanese policy-makers, causing them
to abandon their attempts to stifle the yen's gains.
Still, the future of the strong-dollar policy promoted by
former Treasury secretary Mr Robert Rubin is in play. In
Mr Summers' confirmation hearings in the Congress, he
vowed to maintain the strong-dollar policy. The US still
wants the benefits from a powerful currency which has
helped keep inflation and interest rates low, and extended
the US economic boom.
But because the worsening US trade deficit is fuelling
protectionist forces and creating an unhealthy reliance on
foreign inflows of funds, the US fears further appreciation
of the dollar against the euro or the yen. There is also
concern that a weak yen could hurt the still fragile
economic recoveries in Asia.
The yen is heavily in demand because investors have
rushed into the Japanese stockmarket, which has gained
30 per cent this year.
afr.com.au
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