Commentary: Across Asia, the sound of sharpening knives
By William Pesek Jr. Bloomberg News
Tuesday, December 7, 2004
'Et tu, Indonesia?" It was with this question that the Oxford University economist Brad Setser began a recent report on the U.S. dollar's mounting problems. The question is also appropriate for its global implications.
The reference, of course, is to "Julius Caesar" by William Shakespeare, in which Caesar utters the words "Et tu, Brute?" (Even you, Brutus?) upon learning that his friend is among the assassins stabbing him to death.
No, Indonesia isn't stabbing the United States in the back, regardless of what some in Washington may think, as it considers trimming its holdings of U.S. Treasuries.
Aslim Tadjuddin, deputy governor for monetary policy at Indonesia's central bank, dropped that bombshell in a recent Bloomberg interview.
Indonesia's was merely the latest central bank to suggest that it may sell some U.S. Treasuries if the dollar continues to decline.
Days earlier, Russia's central bank rocked currency markets by suggesting it might switch from dollar-denominated assets to euro assets.
China Business News also raised eyebrows late last month after it reported that Beijing had cut its U.S. debt holdings.
The news shook markets because China, with $174 billion of Treasuries, is the second-biggest holder after Japan. While a Chinese central bank official said the report was "distorted," markets fear the worst.
Taiwan, the third-largest holder of foreign-exchange reserves, had to deny reports that it planned to reduce U.S. debt holdings as the dollar slides. Such a move by the island, which has $57 billion of Treasuries, would surely bolster U.S. debt yields.
Central banks are loathe to confirm that they're dumping Treasuries; the mere announcement will drive down bond prices, forcing them to eat even bigger losses than they have to date.
Regardless of what central bankers here say, however, Asians are increasingly looking to forestall big losses on their U.S. Treasuries holdings.
The real question is, when will Japan join the fray? It is by far the biggest holder of Treasuries among central banks, with about $740 billion.
If Tokyo gets uneasy about the falling dollar pushing up bond yields, officials could pull the plug on the United States. That would probably prompt sales by other nations, especially in Asia.
U.S. Treasury officials could not have been happy with recent comments by Kaoru Yosano, a senior member of the governing Liberal Democratic Party in Japan.
"The Japanese government is going to ask for a strong dollar policy," he said. "If it continues to fall, there would be enormous capital flight from the dollar."
Some currency traders interpreted that as a veiled threat that Tokyo may begin trimming its Treasury holdings. Perhaps markets misunderstood Yosano, yet his remarks evoke an episode seven years ago when such a scenario seemed all too possible.
"Several times in the past, we have been tempted to sell large lots of U.S. Treasuries," Ryutaro Hashimoto, the Japanese prime minister at the time, told an audience in New York in June 1997.
One such moment, Hashimoto said, was during Japan's negotiations with the United States over auto sales.
He also cited occasions when "the exchange rate has suffered extreme movements and the American people have done little but look at domestic issues."
Hashimoto summed things up this way: "We were very tempted on these occasions. However, in terms of fund management, we did not take the most advantageous road."
Japan spent the next few weeks doing damage control, claiming Hashimoto had been misinterpreted.
Yet the inference seemed clear. The prime minister had just come from a Group of 8 meeting in Denver that featured considerable chest-thumping by the United States about its booming economy. Japan's leader was merely reminding Washington that while it had created a robust, highly productive economy, Asian central banks held the deed.
Whether Japan would dump vast amounts of U.S. debt is anyone's guess.
It would be a mistake to ignore the risk, as the Federal Reserve chairman, Alan Greenspan, suggested last month when he said foreign demand for U.S. assets might wane.
Greenspan's worry is that investors are suddenly realizing the U.S. current-account deficit - approaching a record 6 percent of the economy - is a problem. It may make dollar-selling the trade of choice in markets everywhere.
Again, all eyes are on Japan. Its much-hyped economic recovery is losing steam and the yen's rise this year is a growing headwind, with investment banks like Morgan Stanley lowering their forecasts for the dollar.
The bank reduced its June estimate to ¥95 per dollar from ¥115 and cut its year-end 2005 projection to ¥92 from ¥117.
That would undermine not only Japanese growth rates, but also the handful of exporters driving the recovery.
Japan's tolerance for a rising yen is being severely tested. That is especially true amid the perception that the United States now favors a weaker dollar and that the Bush administration seems likely to widen an already record budget deficit.
If Japan turns on U.S. debt, expect Asia's central banks to follow suit. That would slam the U.S. bond market, considering that the U.S. Treasury holdings of China, Hong Kong, Japan, Singapore, South Korea, Taiwan and Thailand total $1.1 trillion.
Debt investors the world over have been wondering if Asia's central banks will pull the rug out from under the U.S. bond market. Such a step may indeed be close at hand.
Copyright © 2004 The International Herald Tribune / www.iht.com
