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To: Mark Bartlett who wrote (21250)	10/9/1998 9:34:00 AM
From: Alex	Read Replies (2) \| Respond to of 116762

Secret deal on $US-yen dive By Tony Boyd, Tokyo A secret agreement between the world's two economic superpowers, Japan and the US, lay behind the sudden dumping of the US dollar. The 15 per cent free-fall in the dollar against the Japanese yen over the past week has opened the way for the Bank of Japan to begin a massive money-printing exercise to rescue the nearly insolvent Japanese banking system. But it is a high-risk strategy that could threaten the US role as the engine of economic growth and kill any chance of a recovery in the Japanese economy. It may also threaten a new wave of financial contagion triggered by the sudden dramatic unwinding of highly leveraged positions in world capital markets by hedge funds. Currency strategists are convinced that the week's movements in the dollar have never been seen before in 25 years of floating exchange rates, and that this will inevitably produce big winners and big losers. Japanese exporters are being butchered in the Tokyo stockmarket, which on Friday fell to its lowest closing level since December 1985. Japanese retail investors who pumped an estimated 30 trillion yen into US dollar bond funds have suffered severe losses, and Japanese life insurers and pension funds also have heavy exposure to higher-yielding US dollar assets. Asia is a winner, as shown by movements in regional stockmarkets on Friday, with the Hang Seng Index up nearly 4 per cent, Seoul up 6 per cent, Jakarta up 7 per cent in early trade and Manila up 4 per cent. The Australian market was quiet, losing 12 points to 2491.30, while the Australian dollar maintained its relationship with the higher yen, trading around US61.70¢. A strong yen is good for Japanese banks because every Y1 fall in the currency's value against the $US forces Japanese banks to cut their assets by Y1 trillion to maintain their capital adequacy ratios at the minimum level demanded by the Bank for International Settlements. Even those who doubt that there was a US-Japan plot to strengthen the yen believe that the latest foreign exchange movements will enable the BoJ to monetise Japan's bad loans without risking a free-fall in the yen. "The US has abandoned its strong dollar policy in favour of rescuing the Japanese banking system, which it sees as the biggest problem in the global financial system," said Mr Ken Landon, currency strategist at Deutsche Morgan Grenfell. "The Japanese Government knows they have to recapitalise the banks, and to do that the BoJ has to start the printing presses. "If they tried to do it at 130 or 140 yen to the dollar there would be a run on the currency and the yen could free-fall to 180 or 200 yen." Mr Landon said the comments on Friday by US Treasury officials in Washington and officials from the Ministry of Finance in Tokyo supported the view that both countries want a weaker dollar. He believes the deal between the US and Japan was agreed in September, when the first signs emerged of an end to the bull trend in the dollar. During the week, US Treasury Secretary Mr Robert Rubin refused to confirm that the strong dollar policy remained, and Japanese Finance Minister Mr Kiichi Miyazawa said he was worried about volatility but did not comment on the yen's sudden strength. Mr Ravi Bulchandani, chief currency strategist at Morgan Stanley Dean Witter, said: "The Ministry of Finance is modestly approving yen strength because it knows the amount that will have to be injected into the Japanese economy will open the risk of a yen free-fall, and they are trying to start it as high as possible. Because they are so concerned that any attempts to inject liquidity into Japan will just leak overseas, they are making it very uncomfortable for Japanese investors to send money abroad." Mr Bulchandani said the change in the strong US policy was bad news for the world economy because a falling dollar made it less likely that the US could continue to be the growth locomotive for a faltering world economy. Deutsche Morgan Grenfell's Mr Landon said the strong yen strategy carried high risks, but it fitted well with the desire of industrialised nations, especially Japan, to punish highly leveraged hedge funds which are the main source of the world's speculative capital flows. Financial markets are fearful that the sudden yen movements, including a ¥12 movement on Wednesday and ¥10 movements up and down on Thursday and Friday, will lead to more huge losses at hedge funds. The extraordinary leverage of the hedge funds was revealed when the rescued New York-based LTCM admitted it had borrowed $US50 billion in funds for each $US1 billion in capital. afr.com.au