Weaker yen sparks hope of
stronger global economy
By Tony Boyd, Global Markets Editor
A sudden change in Japan's foreign exchange rate policy
from a strong to weak yen is shaping as a turning point in
the global financial crisis which began 19 months ago with
the devaluation of the Thai baht.
Market analysts say that if the US endorses the Japanese
action at this weekend's meeting of finance minister's
from the Group of Seven, it will signal a much more
optimistic outlook for the global economy.
The US effectively abandoned its strong dollar policy last
year to avoid a series of currency crises across the globe
after the Russian devaluation, but the US now appears
ready to change.
Deutsche Bank currency analyst, Mr Michael Lewis,
said: "Strong growth in the US may be tilting the US
Treasury [back] in favour a strong dollar to lessen the
risk of tightening [interest rates]."
The G7 meets in Bonn on Saturday with pressure
mounting on Japan to show it is serious about revitalising
its economy, which has been staggering from crisis to
crisis.
This is in stark contrast to the positive developments in
other Asian countries and the return of relative stability to
Latin America.
Comments from Japanese officials that they were
prepared to tolerate a weaker yen hit the Australian
dollar this week.
The $A lost nearly 1¢ to a low of US63.32¢ on Tuesday
night as it tracked the yen's fall against the $US.
The yen weakened against the dollar from 117.51 to
118.90 before recovering some ground in London
trading last night to ¥118.50.
Leading Wall Street investment bank Morgan Stanley
Dean Witter yesterday announced it was on the brink of
upgrading its growth forecasts for Asia (excluding Japan)
and Latin America because of "the confluence of
recovering currencies and related reductions in interest
rates".
Morgan Stanley's chief economist, Mr Stephen Roach,
said that in Asia there were "stirrings on the export front
that we believe are about to be accompanied by a
gradual upturn in domestic demand". Capital was
returning to the Asia and there was an upsurge in mergers
and acquisition activity.
In Japan, a familiar policy paralysis was broken this week
with the decision to allow a weaker yen and resume
Ministry of Finance buying of government bonds.
But there is understandable scepticism in financial
markets because of the timing of the announcement just
prior to the G7 meeting.
Japan's policy responses are being confused by the rising
international pressure, predominantly from the US, to
force the Bank of Japan to monetise the country's
government debt, which is running at more than 10 per
cent of GDP.
Mr Lewis said G7 members would want to see evidence
of real changes in Japanese economic policy before
giving their stamp of approval for a weaker yen.
Japan's decision to tell markets it would be happy with a
weaker yen is an implicit admission that the economy is
not pulling out of recession as quickly as the Ministry of
Finance and Economic Planning Agency had believed.
"A weaker yen should be a stabilising factor for Japan,"
said Mr Andrew Pease, senior economist at Nomura
Australia.
The key issue for Australia was to see whether there was
a repeat of last year's yen weakness when the $A was
treated as a proxy for Asian currencies and sold off in
tandem with the yen.
"It's too early to say whether the correlation will be
repeated but there is good evidence to believe it won't,"
he said.
Mr Cameron Umetsu, currency strategist at Warburg
Dillon Read, said a weaker yen would be positive in the
short term for the Japanese economy because of the lift it
would give to exporters.
However, he warned that there would not necessarily be
a smooth transition from a foreign exchange rate band of
¥110-¥120 to ¥120-¥130.
The extraordinary performance of the US economy,
which has underpinned world economic growth, is
expected to continue this year, with many market analysts
upgrading growth forecasts including Deutsche Bank
chief economist Mr Joe Carson who now expects growth
of 3.9 per cent in 1999 instead of 3 per cent.
afr.com.au
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