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To: MUDMAN who wrote (13068)	6/13/1998 11:38:00 AM
From: Gabriela Neri	Respond to of 116790

Before you go long the Yen, you may want to read this for another take on the matter. Rubin has a plan, that much we all can be quite sure. The question is, is it plan A, plan B, or plan X. Whoever figures that out will make a tidy sum. Currencies: Too Far, Too Fast Ravi Bulchandani (from Tokyo). It is rare indeed that one gets such instant gratification as a currency forecaster, and the yen is now hurtling towards our new 150-160 target at breakneck speed. Observing the reaction in Asia at large it seems that this is a dangerous interlude. I have always maintained that the end result of all of this is likely to be good news because a recovering Japanese economy is the best hope for Asia. But in the interim the combination of a weakening yen and a faltering Japanese economy is dangerous. Unfortunately, I cannot see an alternative to further yen weakness. What good will a weakening yen do? In my view, a weakening yen is the only hope for a self sustaining, structural recovery in Japan. In the first, place keeping the export sector on fire is the only hope that this will eventually spill over into domestic demand (and note that export performance to Asia would suffer because of yen strength against Asian currencies). But a weak yen also has an important role to play in producing an investment recovery, led by foreign investment. A strong yen has acted as a serious barrier to entry for foreign capital into Japan and has prevented the transformation of Japan into a truly modern and restructured economy. While there seems no denying that Japanese manufacturing industry is, at its best, a world beater, the restructuring of large swathes of the financial and services sector remains to be completed. I believe that foreign capital has an important role to play here, and witness the very rapid transformation that is already occurring in the financial sector. Aggregate investment levels are low in Japan, and the existing allocation of capital would leave much to be desired. As the yen gets cheaper and cheaper it strikes me that the percentage of capital formation undertaken by foreigners would increase, and further that foreign control of capital allocation decisions would also increase - a significantly lower yen would offset the many regulatory and other barriers to foreign investment in Japan. Given the very poor returns on the existing capital stock, it is quite likely that the returns on investment undertaken by foreigners will be higher than on the existing capital stock. I have noted before how staggeringly low foreign investment in Japan is. In 1997 Japan had gross inward investment from the US of only $ 1.9 bn, but because Japanese companies invested $ 9.7 bn in the US this meant a net outflow from Japan to the US of $ 7.9 bn. By way of comparison the US attracted net FDI in excess of $ 100 bn in 1997. It is difficult to estimate with any precision what level of the currency will generate significant foreign interest in investing in Japan and our target 150-160 level may well not be enough.