When you make money in gold, what else is there to cash out into?

1:10p ET Saturday, February 21, 2004

Dear Friend of GATA and Gold:

Here's an incisive view from Japan of currency market
manipulation and the political strategy behind it --
a defense of Japanese government policy. This analysis
doesn't much address the question of what Japan and
China will have when their foreign exchange reserves
of U.S. dollars have depreciated to almost nothing,
along with their own currencies. Maybe Japan and China
are Keynesians now too, and as Keynes said, quot;In the
long run we are all dead.quot; But our children survive
us, and are they to be left with so little?

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Japan held hostage by U.S. buyers

Jesper Koll
The Daily Yomiuri, Tokyo
February 21, 2004
a href=http://www.yomiuri.co.jp/newse/20040220wo15.htmhttp://www.yomiuri.co.jp/...

For Japanese policy makers, 2004 is off to a good start.
At home, the economy is showing the first concrete signs
of recovery, and in the world, the global policy maker
consensus is coming around to the long-held view in
Japan that quot;excess volatility and disorderly movements
in exchange rates are undesirable for economic growth.quot;

This is exactly the mantra official Japan has been using
to justify market smoothing intervention over the years.
Since early February, it is part of the official communique
issued by finance ministers and central bank governors
of the Group of Seven countries following their recent
meeting in Boca Raton, Fla. Flexible markets, yes, of
course; but excessively flexible markets, no, thank you.

The global big boys are saying, quot;Sayonara, market
fundamentalism.quot;

To be effective, action must follow words. Here, Japan is
quick to take the lead again. The national quot;war chestquot; to
shelter its corporations from the negative impact of the U.S.
dollar's decline has been beefed up. The numbers are so
staggering that I think it is justified to call the yen a
de-facto pegged exchange rate -- pegged with an upper limit
for the yen against the dollar.

The facts speak for themselves. In 2003 Japan spent about
$180 billion to protect companies against a rising yen. For
this year Prime Minister Junichiro Koizumi's national budget
raises potential intervention firepower by 61 trillion yen or
about $580 billion. Put another way: After spending $15
billion on average every month in 2003, Japan now has the
budget to spend $48 billion per month to protect its
corporations from a falling dollar, and $48 billion is more
than three times Japan's monthly current account surplus.

As if to leave no doubt about the global political economic
realities, $48 billion also amounts to just about the monthly
U.S. budget deficit funding requirement.

Is this money well spent?

The answer, of course, lies not so much in cold-blooded
economic analysis, but in the hard-nosed realpolitik instincts
of Koizumi. First, there is a short-term concern over the July
upper house election. Second, there is a medium-term
strategy to build a competitive advantage for Japan in Asia.
And third, there is a longer-term goal of building a greater
codependency between Japan, the United States, and China.

The domestic election concern is straightforward. Survey
after survey has revealed that, yes, about 50 percent of
Japanese corporations can be profitable with a yen stronger
than 100 yen per dollar. However, reweighting these surveys
by the number of employees, the result changes significantly.

Only 20 to 25 percent of Japanese workers work in companies
that can make a profit if the yen surges past 100 yen to the
dollar. So with four out of five workers exposed to a stronger
yen, political pressure for continued exchange rate
protectionism is poised to stay strong, at least until the
mid-July House of Councillors elections.

Of course, one should always question the validity of these
surveys. Would any managers NOT respond that yes, if it
goes on just a little bit longer, we will have a serious problem?
However, the broad-based political support for stepped-up
market intervention is strong, in the ruling Liberal Democratic
Party and opposition parties.

The medium-term strategy goal of increasing Japan's
competitive advantage in Asia is much more subtle, but, in
my view, much more significant. Theoretically, we can debate
the effectiveness of unilateral foreign exchange intervention
endlessly. But in the real world the effectiveness of Japan's
strategic defense against the dollar's decline must not be
underestimated. The big losers will be European companies,
German ones in particular, because Japan's determination
stands in sharp contrast to Europe's' policy disarray, political
infighting, and central bank inaction.

The result -- yen depreciation against the euro -- will haunt
German and European capital and consumer goods makers
for years to come. It goes far beyond the short-term windfall
profits for Japanese exports to Europe and operations there.
It allows Japanese companies to gain market share and
build deeper relationships and brand loyalty where it really
counts -- Asia in general, China in particular; and when it
counts. For it is now or never that China's demand pull is
accelerating, now or never that China's emerging middle
class is carving out its brand and product preference.

Here Japan's aggressive foreign exchange policy stance
helps out much more than commonly appreciated,
particularly by European politicians focused on domestic
infighting rather than global strategic policy planning.

The third and more longer-term strategic implication of
Japan's foreign exchange policy is that it pushes to a new
level U.S.-Japan codependence, while it strengthens the
Japan-China-U.S. financial nexus.

Increased codependence is evident from the
macroeconomic fact that Japan and the United States
are engaged in the biggest vendor-finance relationship
ever seen. Japan alone funds about 40 to 50 percent of
the U.S. current account deficit by buying U.S. debt.
China and the rest of Asia add another 40 percent to
50 percent. And it is this debt, in turn, that allows the
United States to continue buying made-in-Japan or
made-in-Asia products.

This vendor-finance relationship is, de-facto, impossible
to break. Any businessman knows that the loser in
breaking it will always be the vendor, never the buyer
(as U.S. car companies are poised to find out the hard
way when they try to end zero-finance deals for U.S.
car buyers).

Put another way, Japan and China cannot stop buying
U.S. debt, because doing so would cause a U.S. recession
that in turn would quickly force a sharp rise in Chinese and
Japanese unemployment. For now, the political leadership
in both countries is still too weak to dare taking this step.
And economic prospects for a decoupling -- domestic
demand growth strong enough to absorb the excess capacity
currently taken up by exports to the United States -- remain
too far-fetched at the current state of development.

Make no mistake: The economic, financial, and political
interests of Japan, China, and America have never been
more aligned than they are today.

Importantly, Japan-China financial relations are being
pulled together very rapidly by these factors. The financial
common ground is that taxpayers in both countries find
their money increasingly tied up in dollar-denominated
assets, via the steady rise in official reserves. The power
of the two largest creditor nations -- Japan and China --
acting together, perhaps beginning to renegotiate the
terms of the dollar-based global financial system, would
pose a real challenge to G-7 financial leadership.

This, however, is unlikely as long as the U.S. consumer
is the buyer of first and last resort for the excess capacity
of Japan and China. Unless there is another buyer, the
vendor remains hostage to its buyer.

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