Market Features: G7 Meeting Yields Hints of Japanese Resolve
By Justin Lahart
Senior Writer
6/20/98 2:30 PM ET
Though it was nothing like the Plaza Accord-type meeting that currency market players speculated about yesterday, today's gathering of G7 deputy finance ministers in Tokyo appears to have featured enough substance to add new strength to the yen.
Most of the market-moving news came not from the press statement the G7 and 10 Asia-Pacific economies released after their meeting, but from the asides that the ministers and various ruling Liberal Democratic Party officials made.
The gist of them: Japan seems ready to embark on a program to resolve the bad-debt problems of its ailing banks. Bank estimates given earlier this year put those debts at 77 trillion yen ($567 billion) -- 16% of Japan's gross domestic product. Most Japan watchers put the amount of bad debt well above that.
"We plan to regain confidence at home and abroad by speedily and forcefully clearing away the bad loans," Finance Minister Hikaru Matsunaga said ahead of the meeting.
Other LDP officials backed up Matsunaga's statement. In an NHK interview Saturday evening, Taku Yamasaki, the head of the party's policy affairs research council (which frames policy), said that the LDP would come up with a plan to solve banks' bad-loan problems by July 8. He suggested that one of the things they would consider is the formation of something along the lines of the Resolution Trust Corp., which the U.S. created to deal with the savings and loan crisis.
The Nihon Keizai Shimbun reported that in a meeting yesterday, LDP Secretary General Koichi Kato told Deputy Treasury Secretary Lawrence Summers that the party would come up with a framework for a bridge bank patterned after the RTC by early July. He said that the bill would be submitted to an extraordinary session of the Diet at the end of July. Many forex players have supposed that such a bill would not be introduced until the Diet reconvenes in September -- an extraordinary session is nearly unheard of.
"It seems like they know they have to come up with some sort of package, the goal of which is to build credibility in the FX markets," said Mickey Levy, chief economist at NationsBanc Montgomery Securities. "The key for next week is how the market perceives the package. If the market perceives it positively, if there is any kind of credible package and the yen holds up, then the Treasury market participants will perceive that the flight-to-quality trade will abate some." If investors reallocate some of the funds they have been keeping in the safety of the Treasury market into stocks, that would be a major positive for world equity markets.
Levy remains skeptical, however, whether the package will contain some of the changes he feels are needed. Though the market may cheer an RTC-type bailout, that would not deal with Japan's major problem, he contends. "Until I see the details, I'll have to hold judgment," he said. "Simply dealing with the bad loans is not enough. True reform means addressing not just the symptom of what has happened, but the faulty structure of Japan's financial system."
What has come out of Japan lends support to the yen, but it appears unlikely that things will get downright exuberant.
"Anything less than this would have been disappointing," said Marc Chandler, currency analyst at Deutsche Bank Securities and a TSC contributor. "This is like the bare minimum to avoid the bears coming out again on dollar/yen." As it stands, it looks like the there will be active yen buying when major currency players come back into the market on Monday. Chandler said the key support level on dollar/yen will be the low reached yesterday, when it dipped below 134.
In the wake of the G7 meeting, the yen gained support. Reuters quoted the dollar/yen range today as 136.05 to 137.09. Bloomberg quotes a dollar/yen rate of 135.84. Dollar/yen closed in New York yesterday at 137.05. The Taiwanese and South Korean stock markets, which trade on Saturday, both moved higher on the noise coming out of Japan. In Taipei, the Weighted Index climbed 55.67 to 7817.27. In Seoul, the Kospi added 2.49 to 315.75. |
