Currencies

[Amaunet]

Japan's woes rise with the yen
By Kosuke Takahashi

December 11, 2004

TOKYO - Faced with a gloomy outlook for the faltering US dollar, the Japanese business and financial community has begun to seriously worry about a possible slowdown in its economic recovery. The rapid appreciation of the yen against the dollar could hurt Japan's flagship exporters' earnings at a time when the world's second-largest economy is finally getting out of its decade-long deflationary depression.

The US dollar has fallen against all other major currencies over the past month. The dollar fell to an average of 106.61 yen in November, from 110.25 yen in October. Last Thursday, it dived to a near five-year low against the yen at 101.83 in Tokyo. A rapid decline in the dollar would make it difficult for companies to hedge against currency fluctuations, a government survey said, as most companies had expected the dollar to trade above 100 yen for the fiscal year ending March 2005. The exporters surveyed said the dollar's fall below the 100 yen mark might force them to change capital investment plans and speed up shifting production overseas.
There was a slight reprieve from late Thursday, though, as the dollar edged up, buying at 104.94 yen. "Like it or not, the world has no alternative key world currency but the dollar," said Kimiyoshi Tsukasaki, an economist at the Japan Center for International Finance. "We must embrace the dollar as the key world currency for the foreseeable future."

Masayuki Kichikawa, senior economist at Mizuho Securities Co, holds similar views. He told Asia Times Online that the US, Europe and Asia need to share the burden of averting a dollar crisis. He pointed out that the US alone cannot solve the issue of its towering budget and trade deficits in a short period and that European and Asian countries would need to accept the lower dollar. "The huge US current account deficit is being financed by central bank intervention, mostly by Asian countries. To cut that deficit, the US has to make progress on fiscal deficit reduction and on the gradual strengthening of interest rates."

The US budget deficit in the fiscal year ended September hit a record $412.5 billion, while the trade deficit is a record high of $530.6 billion. President George W Bush has pledged to halve the budget deficit by fiscal 2009, but he has also promised to make massive tax cuts and is expected to seek Congressional approval of an additional $70 billion to finance military operations in Iraq and Afghanistan.

Most Japanese economists do believe the dollar is likely to break the psychologically intimidating 100 yen mark downward this spring temporarily. They hold that the dollar will eventually turn upward, supported by adequate policy measures. They are not sure what exchange rate the recovering Japanese economy can sustain. Some say it is 100 yen, others say 95. But for now, Japanese business leaders and government officials are worried about the adverse impact of the yen's rapid appreciation. Earlier this week, Hiroshi Okuda, head of the Japanese business lobby Keidanren and chairman of Toyota Motor Corp, said Japanese exporters would be shackled by the dollar's fall if it persists. This is because a strong yen hurts Japanese exporters as it raises the prices of their products in overseas markets and cuts into the value of their overseas sales when repatriated back into yen.

Apart from worries about a slowdown in exports, a weaker dollar could also trigger a surge in imports of cheaper products into Japan, especially from China, whose currency is pegged to the dollar. "The inflow of cheap goods could prevent Japan from breaking out of the deflationary spiral," said Tsukasaki.

Though Prime Minister Junichiro Koizumi said on Thursday that exchange rates should be left to the market, Finance Minister Sadakazu Tanigaki earlier went on record as saying he was keeping a close watch on exchange rates. "Recent moves have been very rapid. We need caution, and if necessary, we'll take appropriate steps against excessive moves," Tanigaki told reporters earlier this week. The current consensus, however, is that the Japanese monetary authorities will refrain from intervention, largely because Washington has criticized Tokyo for keeping the yen artificially low to maintain the competitiveness of Japanese exports.
In 2003 and early 2004, Japan kept on selling yen and buying dollar to halt the yen's appreciation, drawing sharp criticism from US manufacturers. Thus mid-March onward, the Japanese authorities have kept away from the market. In any case, if the Japanese monetary authorities were to intervene in the exchange market, it would be more out of concern for the plunge in the stock market that a surging yen has triggered. The yen's rapid rise, if it goes on any longer, may derail the economic recovery by throwing cold water on exports.

Kosuke Takahashi is a former staff writer at the Asahi Shimbun and is currently a freelance correspondent based in Tokyo. He can be contacted at [e-mail].

http://www.atimes.com/atimes/Japan/FL11Dh02.html