Japan's yen-capping plan
may backfire - analysts
10:22 a.m. Sep 20, 1999 Eastern
By Shinichi Kishima
LONDON, Sept 20 (Reuters) -
Attempts to curb the yen's rise by
easing Japan's already ultra-loose
credit policy could backfire if
additional easing merely fuelled the
economic growth which is driving the
yen higher, London-based
economists said.
Japan's Finance Ministry is
pressuring reluctant Bank of Japan
policymakers, meeting Tuesday, to
ease policy further even though
interest rates are already close to
zero.
The ministry is concerned yen
strength could choke off the nascent
recovery and is desperate to garner
U.S. support for joint intervention.
Wary of the measures the Bank of
Japan could take, such as essentially
printing money to boost the domestic
yen money supply, the Japanese
currency retreated further from
recent 3-1/2 year highs against the
dollar on Monday.
Yet, analysts reckon that Tokyo's
need to show Group of Seven
partners in Washington this weekend
that it's doing everything to stimulate
its economy means the medium-term
outlook for the yen only brightens as
a result.
If growth improves, for example,
foreign demand for Japanese stocks
fuels yen buying.
``At this stage, it's more an issue of
growth driving the currency, rather
than the opposite,' said Alfonso
Prat-Gay, global head of forex
strategy at J.P. Morgan. ``From that
point of view, I really don't see what
they can do about it.'
``If they succeed in bringing real
interest rates down...that would be
very supportive for an economy that
is already picking up,' he added.
``Therefore, it will end up being
supportive for the yen -- not in the
short run, maybe, but in the medium
term.'
YEN SURGE DRIVEN BY
GROWTH
The yen's 17.3-percent rise from last
May to last week's multi-year high of
103.17 per dollar has been fuelled
primarily by surprisingly strong
growth in Japan's economy for the
first two quarters of 1999.
Talk in the market now is that the
BOJ may adopt easing measures it
had previously opposed in order to
make sure the Tokyo government is
in a position to tell Saturday's G7 it is
doing everything within its power to
sustain the long-awaited recovery.
The BOJ could adopt ``unsterilised'
intervention, in which it refrains from
draining excess liquidity which results
from its yen sales on the currency
market. Or it may opt for what is
known as ``quantitative easing,'
where it injects liquidity into the
market to achieve certain inflation
targets.
In addition, Japan was expected to
come up with a huge fiscal stimulus
package totalling more than 10
trillion yen ($93.61 billion).
Steve Barrow, currency strategist at
Bear Stearns in London said fiscal
steps should accompany any
monetary easing as a boon to the
economy, even though he thought it
made little sense as a way of
weakening the yen.
``The whole problem with this
monetary issue in Japan is that it
doesn't matter how much money you
flood into the short end (of the
money market) if individuals and
businesses don't want it,' he said.
``All it's going to do is probably pour
out into foreign assets, which helps
correct the yen problem but does
nothing to the economy.'
U.S. RELUCTANT TO BUY
DOLLARS Yet, whatever the
Japanese authorities did this week,
they could well be in for a
disappointment on concerted
intervention.
Paribas economist Paul
Mortimer-Lee said in his daily
commentary that he saw no
inclination by, or benefit for, the U.S.
to join Japan's effort to push up the
dollar.
``We do not see a fall in the dollar as
a bad thing, given that it should help
to address the external deficit,' he
said.
((London Capital Markets
+44-171-542-6721,
shinichi.kishima+reuters.com))
($1-106.82 Yen)
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