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Friday May 29, 1:00 pm Eastern Time ANALYSIS-Clock is ticking on Japanese yen rescue By Henry Engler LONDON, May 29 (Reuters) - Are the U.S. and Japan ready to put a stop to the yen's depreciation? The question has taken on greater urgency, say analysts, with the economic implications of continued yen weakness seen devastating, not only to Asia but also to the industrialised and emerging economies in the West. ''At some unpredictable stage we are going to get massive intervention to strengthen the yen,'' said Jim O'Neill, chief currency economist at Goldman Sachs. ''The weakness of the yen has the capability of turning the world down.'' With the dollar continuing to make new highs against the beleaguered currency, speculation of concerted intervention by the two powers intensified on Friday, with some believing that currency markets had become vulnerable to central bank action. ''The one strong idea that favours intervention at this point is the fact that the market is very long dollars,'' said one London dealer. On Friday the U.S. unit hovered around 139.00 against the yen, just shy of an overnight peak of 139.20, the highest since July 1991. For many, a breach of the 140.00 level would open the door to much higher levels. ''If we get through 140 I think the authorities will have a much harder time stopping it,'' added another dealer. Just why the U.S. and Japan have not shown their hand is by no means clear. Numerous theories, including the benefits the U.S. economy accrues in the form of reduced import prices from dollar strength, were offered to explain the conspicuous silence and lack of action from Washington. But there is also a much more powerful and potentially disruptive idea brewing which sees yen depreciation and monetary stimulus by the Bank of Japan as the only way to turn around Japan's ailing economy. Essentially, the thrust of the argument, advocated most prominently by U.S. economist Paul Krugman, suggests that Japan is in a liquidity trap -- a situation where monetary policy becomes ineffective because interest rates cannot be pushed below zero. By reverting to the printing press, the Bank of Japan might be able to revive domestic demand by encouraging a rise in inflation expectations. The strategy, however, would risk putting Japan's neighbours on red alert. Many analysts said a significant fall in the yen would invariably cause China to devalue the yuan and lead Hong Kong to sever its currency link with the dollar. The two events would have dire consequences for markets around the world. ''The weakness in the yen could increase inflationary expectations in Japan and that could get the consumer to start spending again,'' said another London analyst. ''But the question you have to ask is at what cost? I'm not sure the U.S. and Japan would run the risk that the Asian economies implode.'' With time and options dwindling, there was a growing sense that something dramatic was needed from either Washington or Tokyo to re-instil investor confidence and allow time for Japan's stimulate fiscal policies to work their way through the economy. Intervention was seen as one of the few options available to policy-makers, a signal to international markets that further yen depreciation was not seen as the panacea for Japan's troubles. The timing of such action, as always, was the hardest part to predict, said analysts |
