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Strategies & Market Trends : JAPAN-Nikkei-Time to go back up? -- Ignore unavailable to you. Want to Upgrade?

To: chirodoc who wrote (1170)	6/18/1998 9:48:00 AM
From: chirodoc	Respond to of 3902

Marc Chandler: The Yen, Intervention and China By Marc Chandler Special to TheStreet.com 6/17/98 10:43 AM ET The yen has fallen further and faster than market participants expected. It has lost nearly 13% of its value against the dollar, 12% against the British pound and 11% against the mark this year. <Picture> This weakness has exacerbated the economic crisis throughout East Asia. While officials inside and outside Japan have expressed concern about the yen's weakness, they have stopped well short of coordinated intervention. The Federal Reserve intervened on its own behalf earlier today in cooperation with the Bank of Japan. The magnitude of the intervention is not clear yet, but it appears to be fairly aggressive. The dollar sales will have to be sterilized -- that is, offset by operations at the Federal Reserve. Otherwise short-term U.S. yields would fall, something that is not desired by the FOMC, which still has a tightening bias. Japan itself has intervened twice to support the yen in this cycle. The first time was last December. Judging from the reserve data, the Bank of Japan probably sold around $7 billion worth of dollars. Within a week of the intervention the yen had totally given back the intervention-inspired gains. More recently, the BOJ intervened aggressively in April. The reserve data suggests that the BOJ sold around $20 billion worth of dollars in its two-day operation, which included the Federal Reserve executing the dollar sales for Japan in the New York market. This time it took the market three or four weeks to push the yen below the intervention levels. The Federal Reserve's dollar sales may signal a fundamental change in U.S. policy. Up until now, Treasury Secretary Robert Rubin's mantra has been that a strong dollar is in U.S. interest. Today's intervention risks discouraging foreign capital inflows, which are critical now as the U.S. current-account deficit yawns wider. U.S. intervention could potentially trigger a dramatic selloff in U.S. stocks and bonds, which itself could have systemic consequences as it ripples through the global capital markets. Perhaps this risk might be worth taking were the likelihood greater of a successful intervention. But without the prospect of a self-sustaining economic recovery, intervention will become a subsidy to investors and speculators. Data released earlier this week show that Japanese investors bought a record amount of foreign bonds, which oddly enough is roughly the size of the intervention ($20 billion). While market participants are aware of the weakness of the Japanese economy, data continue to be reported weaker than expected. The one positive contribution to growth has been exports, but now even this engine is puttering and actually acted as a drag on the Japanese economy in the first quarter. The 16 trillion yen package that was announced earlier this spring has failed to win the market's confidence and, more importantly, the confidence of the Japanese people themselves, who continue to move their savings overseas. The tax cuts were too small and are only temporary to boot. The public works spending lacks transparency and is the same old medicine that has failed to revive the economy for years. Unemployment is reaching record levels without the economic stabilizers of a strong social safety net. The scandals that have snarled Japan's businesses, political leaders and bureaucrats have eroded confidence in the elite, but the reform movement is still too weak and fragmented to offer a viable alternative to the ruling Liberal Democrats. (See my column from April.) From a systemic perspective, the dangers of not stopping the yen's free-fall have risen sharply. The yen's and Nikkei's weakness are exacerbating the region's economic woes. Japan is not in the position to act as the regional locomotive. So far China has been relatively unscathed, but the regional woes are beginning to take their toll. Growth is unlikely to be sufficient to absorb the vast numbers of job seekers. China appears willing to help most of the small depressed countries in the region, but its $1 trillion economy is too small to support Japan, the world's second largest economy. The Group of Seven's unwillingness or inability to stem the yen's decline may encourage China to devalue the reminbi to recapture lost competitiveness, which could turn what President Clinton euphemistically called bumps in the road (to Asian prosperity) into a full-fledged global financial crisis. Despite the implicit threat, a Chinese devaluation is not necessarily a done deal. China continues to enjoy a current account surplus, and current-account-surplus countries tend not to devalue. Even in May, when China's exports fell, its imports fell more. Through May exports are up over 8.5% year-over-year. Unlike other countries in East Asia, China has little foreign debt. The reminbi itself is not convertible, so access to it by speculators is limited. Many seem to think that a devaluation of the reminbi would restore China's competitiveness. Such arguments exaggerate the benefits of devaluation. It is not clear which beleaguered East Asian country is enjoying the benefits of enhanced competitiveness since seeing its currency plunge. The competitive gains are quickly eroded by inflation. Recall that when Mexico devalued in 1994, Argentina and Brazil came under pressure but did not devalue and in fact continued to grow. The inflation (and loss of living standards) unleashed by the peso's devaluation is still evident today. Moreover, China's concern is not simply the loss of competitiveness per se, but rather the loss of access to credit represented by Japan's banking crisis and the inhospitable environment for listing equities on the Hang Seng, which was a key way it was going to privatize and modernize. China arguably has more to lose than to gain from devaluing the reminbi. Over the past year, China has emerged as a regional leader. Devaluation now amid the region's crisis would likely cost China its improved status. China's larger political agenda, including most-favored nation status and membership in the World Trade Organization, would be jeopardized. Devaluation would also discourage foreign direct investment inflows that China needs to help it modernize its economy. Lastly, Hong Kong and China together have greater reserves than Japan to defend their currencies and thus far have spent very little defending their currencies. It seems unfair that the U.S. accepts Japan's yen depreciation but encourages China to hang tough and not devalue. No doubt this will be discussed when Clinton visits China at the end of next week.