<OT> This can't hurt;
September 10, 1999
Dollar Hits Three-Year Low
Against Yen; Japan Intervenes
By MICHAEL R. SESIT
Staff Reporter of THE WALL STREET JOURNAL
LONDON -- The dollar was pummeled to a three-year low against the
yen Thursday, adding to the Japanese currency's startling winning streak
since May. But many currency analysts don't believe the yen can remain at
such a lofty level against the greenback for the long term.
Early Friday in Tokyo, the Bank of Japan intervened in currency markets
when the U.S. dollar fell to around 107.75 yen, selling yen and buying
dollars in order to reduce the yen's value. The dollar quickly rose and
briefly touched the 110-yen level, but receded to 109.67 yen, up from
Thursday's closing in Tokyo, as traders took profits.
Thursday's three-year milestone came after unexpectedly strong Japanese
economic-growth data spurred global investors to snap up the yen, which
has now surged 16% against the dollar since late May. Behind the surge,
among other things, are renewed investor interest in Japanese stocks, faith
that Japan's economy is on the mend and worries about U.S. markets and
American ability to attract foreign funds to finance the ballooning U.S.
trade deficit.
What has made traders especially daring in
pursuit of a stronger yen against the dollar is
that the Bank of Japan, which spent $37
billion in June and July in a vain attempt to halt
the yen's rise, has stayed away from the
market. What is more, there is little indication
that U.S. authorities are, as yet, overly
concerned.
How far the yen can rise from here is a much-debated question -- one that
rests largely on how much forecasters believe Japan's nascent economic
revival is for real. Economists and investors were flabbergasted by Japan's
first-quarter growth. And, while no one believed the country could sustain
that torrid pace, many were still surprised that growth in the following three
months was positive at all.
In the short-term, said Brian Martin, head of economic and
foreign-exchange strategy at Barclays Capital, the dollar could fall to 105
yen and possibly even 100 yen. But he contends it won't stay that weak for
long, because "it's just killing the Japanese economy, and there's no way
Japan can continue to rely on deficit spending to shore up economic
growth."
A rising yen -- and falling dollar and euro -- makes it easier for U.S. and
European companies to compete with their Japanese rivals on world
markets. That in turn should also enhance the Western companies'
profitability.
For dollar and euro-based investors, the climbing yen adds extra power to
an already highflying Tokyo stock market. As measured by the Dow Jones
Global Indexes, the stronger yen combined with the stock-market rise
gives a 42% increase for an American and even more for a continental
European investor, so far this year.
But, more important, there is a big downside to a strengthening yen that
eventually could hurt both companies and investors: "It acts as a tightening
of monetary policy in Japan, which postpones the economy's recovery
there," says Mr. Martin of Barclays. "And as long as the economy in Japan
remains weak, the demand for U.S. and European exports stays weak,
which exacerbates the widening U.S. trade deficit."
In late New York trading Thursday, the dollar stood at 107.94 yen,
compared with 111.06 yen late Wednesday. Meanwhile, the euro declined
to $1.0545 from $1.0599 the day before; and the British pound rose to
$1.6354 from $1.6185.
At one point Thursday, the dollar traded at
107.55 yen, its lowest level since Aug. 28,
1996. Japan's hard-charging currency also
climbed to a record 113.05 yen to the euro at
one point, translating into an 18% rise against the euro this year.
Japanese leaders moved unusually quickly to trumpet the intervention
Friday, hoping to heighten the impact of the move on financial markets.
Finance Minister Kiichi Miyazawa confirmed the intervention. Asked by
reporters whether Japan was acting in concert with the U.S., Mr.
Miyazawa dodged the question -- though he noted that Japan is always in
close contact with American authorities. Economic Planning Agency
director Taichi Sakaiya called the intervention an appropriate step,
reflecting fears among leaders here that the yen's steep appreciation
threatens the recovery that seems to be taking hold in Japan's
long-slumping economy.
Carl Weinberg, chief economist at consultants High Frequency Economics
Ltd. in Valhalla, N.Y., said that Japanese stocks will keep rising -- and the
yen along with them. But in the long run, he cautions, "the risks are that
Japan's economic expansion will run into obstacles -- such as available
credit, a strong yen and high fiscal deficits -- and will not mature into a
sustained push back to prosperity."
"Thus," adds Mr. Weinberg, "Today's gains in the Nikkei and the yen may
be gone within a year."
Still, the Japanese currency so far is standing tall. A big reason is the wads
of money flowing into Japan. Another is the fear that they won't keep
flowing into the U.S.
Indeed, James O'Neill, chief currency economist at Goldman Sachs
Group, points out that the U.S. current-account deficit is running at an
annual rate of $350 billion to $400 billion, or about 4% of America's total
economic output. Since Americans don't save enough, that shortfall must
be financed by foreigners. So far, they have been willing to, gobbling up
U.S. stocks and bonds.
But Mr. O'Neill argues that the deficit "is unsustainable at current levels of
the dollar and [U.S.] financial asset prices." In other words, he says, "To
keep foreigners buying, the dollar must fall enough to offer them a chance
of capital gains, or U.S. interest rates must rise high enough to offer them
protection against a weaker dollar."
Write to Michael R. Sesit at michael.sesit@wsj.com
|
