Greenspan tidbits on 'Home Bias' & Japan;
One factor boosting the yen is a significant yen bias on the part of Japanese investors. This propensity, in my judgment, runs far beyond the normal tendency of investors worldwide to buy familiar domestic assets and eschew foreign-exchange risk.
Nowhere else in the world will investors voluntarily purchase ten-year government obligations at an interest rate of 1 percent or less, especially given a rate of increase in the outstanding supply of government debt that has generally been running at 9 percent over the past year. Not surprisingly, very few Japanese government bonds (JGBs) are held outside of Japan.
Aside from the holdings of the Bank of Japan, almost all JGBs are held by Japanese households, banks, insurance companies and the postal saving system. And none of them holds significant amounts of foreign assets; 99 percent of household assets are in yen, and, including the postal saving system, about 91 percent of the assets of financial institutions are in yen. Japanese nonfinancial corporations do hold a larger share of foreign assets in their securities' portfolios, but the absolute amounts are small. The Japanese have made significant foreign direct investments, especially in the United States, and the Ministry of Finance does, of course, hold large dollar balances as a consequence of exchange rate intervention. But the Japanese private sector, by and large, has exhibited limited interest in accumulating dollar or other foreign assets, removing what in other large trading economies would be a significant segment of demand for foreign assets.
The degree of domestic currency bias in Japan, which far exceeds that of its trading partners, may thus have contributed to a foreign exchange rate for the yen that appears to be elevated relative to the dollar and possibly other internationally traded currencies as well.1 Of course, this preference for yen assets, while a persistent influence on the value of the yen, has at times been overwhelmed by other factors.
Granted the level of intervention pursued by the Japanese monetary authorities has influenced the market value of the yen, but the size of the impact is difficult to judge. In any event, it must be presumed that the rate of accumulation of dollar assets by the Japanese government will have to slow at some point and eventually cease. For now, partially unsterilized intervention is perceived as a means of expanding the monetary base of Japan, a basic element of monetary policy. (The same effect, of course, is available through the purchase of domestic assets.) In time, however, as the present deflationary situation abates, the monetary consequences of continued intervention could become problematic. The current performance of the Japanese economy suggests that we are getting closer to the point where continued intervention at the present scale will no longer meet the monetary policy needs of Japan.
Footnotes
1. The yen bias certainly existed in earlier decades, but it has become more evident as Japanese growth slowed.
federalreserve.gov |
