Japan may move to support tumbling dollar

By Ambrose Evans-Pritchard
The Telegraph, London
Tuesday, March 4, 2008

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/03/ccjapa...

Pressure is building in Japan for official intervention to cap the surging yen before it triggers a sharp industrial slowdown and tips the country back into slump.

The currency has appreciated by 19 percent against the dollar to 103 yen since July as Japanese investors retreat from global markets. Foreign hedge funds that borrowed at near zero-rates in Tokyo to chase higher yields abroad are scrambling to unwind "carry trade" positions, estimated at $1.4 trillion in its varied forms.

Fukoku Life, the giant life assurance company, said it planned to "pull out" of US bonds in preference for Japanese debt, a move under way across the Japanese corporate sector as the US yield advantage vanishes. "People are reconsidering the risks" in the US "and see the subprime problems as not being solved at all," said Yuuki Sakurai, the group's finance chief.

Yen strength has sent Tokyo's Nikkei stock index into nose-dive, falling 17 percent this year. It tumbled 4.5 percent yesterday to 12,992, led by Honda and the Seven Samurai leading exporters.

"It's starting to look as if the markets may have to start factoring in a dollar worth 100 yen. This March could be very rough," said Jujiya Securities.

Japan's industrial output fell 2 percent in January on slowing exports to the US, Europe, and lately the rest of Asia.

While China has held up well so far, there is mounting evidence that tighter credit rules are starting to bite.

The Xinhua Finance index of business confidence fell from 67.7 to 60.3 in February and production index tumbled from 61.1 to 51.3. "Over coming months, we expect this deteriorating outlook to becoming increasingly evident in industrial production," said Barclays Capital.

China's yuan has risen 2.6 percent against the dollar this year alone as Beijing attempts to head off an inflationary crisis. Prices rose 7.1 percent in January, with clear signs of knock-on effects into pay demands. The minimum wage in Guangdong is to rise 18 percent in April. The triple effects of tight credit, inflation, and a rising yuan are squeezing export margins, tipping hundreds of companies into the red.

The global outlook is becoming increasingly worrying for Japan's export-geared economy. Vice-finance minister Hiroki Tsuda has refused to confirm or deny Japanese press reports that plans are afoot to cap the yen.

"We won't make any comments on interventions. We can only say that we will carefully monitor daily moves," he said.

Simon Derrick, head of currency research at the Bank of New York Mellon, said the authorities in Tokyo are concerned that a further sharp rise in the yen could play havoc with the Toyko stock market.

"With the Nikkei index now entrenched in a bear market, the last thing they need is another reason for investors to flee domestic equities. We suspect a very active debate is taking place behind the scenes on yen intervention," he said.

The last time Japan acted was during the deflation scare from 2003-2004, when it purchased $250 billion of US Treasuries over a 15-month period. The intervention had the effect of flooding the global bond market and lifting asset prices.

David Woo, currency chief at Barclays Capital, said: "I don't think we are yet at the point where the Bank of Japan is once again going to intervene by buying US Treasuries, but there is no question that people are worried. If the dollar gets to 100 yen, it could happen."

The major Asian powers are increasingly irked by what they see as America's beggar-thy-neighbour policy of dollar devaluation, which effectively steals growth from other countries. The question is when and exactly how they will react.

Often forgotten, Japan is still the biggest creditor nation by far, with net overseas assets of $3,000 billion. Major shifts in strategy by Japanese investors can have huge effects on global markets, all too often catching the rest of the world by surprise.

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