Yen woes may dominate Bush trip

The dollar continues to strengthen against the yen

By David Schepp BBC News Online's North America business reporter

US President George W Bush is in Asia meeting leaders of Japan, China and South Korea and hoping to shore up support for his continuing war on terror.

Of the three, the US can most solidly count on Japan and its charismatic leader, Prime Minister Junichiro Koizumi, who has made it clear he intends to expand the defensive capabilities of his island nation.

Japan's Koizumi is targeting falling prices

Mr Bush's high-profile visit to Tokyo, however, cannot help but focus the world's attention on Japan's continuing economic ills.

The latest data shows that bankruptcies in Japan, the world's second-largest economy, rose to their highest level last month in any January since the end of World War II, after soaring nearly 20% in December.

In addition, the continued drop in the value of the yen threatens trade deals. Critics argue Mr Koizumi has yet to mount an aggressive plan to battle the decade-long slide in the Japanese economy.

Economic enemy No 1

Mr Koizumi has said he is taking aim at deflation, the sustained decline in prices at consumer and wholesale levels, as a way to shore up his nation's deepening economic woes.

But some sceptics view Mr Koizumi's latest hard-line language on the economy as mere jawboning ahead of Mr Bush's visit.

"There is a sense that this is typical in Japan," said Marc Chandler, a currency strategist at HSBC in New York.

"Ahead of high-level meetings, they make a bunch of noises on reform and are again making a bunch of noises," Mr Chandler said.

We would certainly urge the president to tell Japanese officials that the US does not support Japan's policy

Stephen Collins, president, Automotive Trade Policy Council

Economists have blamed deflation for the current economic mess in Japan, including a banking crisis that threatens to render insolvent several large Japanese financial-services firms.

In November, four banks - the giant Mizuho, Chuo Mitsui, Sumitomo Mitsui and Mitsubishi Tokyo - admitted to heavy write-downs from their loan portfolios when they reported semi-annual profits.

Rising dollar, falling yen

The Japanese yen has steadily moved lower against the US dollar since September. In recent days, the yen has traded at roughly 132 yen per $1.

But even as Japan girds itself to battle deflation, concern over the falling value of the yen has largely fallen on deaf ears among Japanese officials, who view cheaper Japanese goods in overseas markets as a boon.

Mr Bush's agenda has little to do with the yen

One of the main forces that has moved the dollar higher against the yen in recent weeks has been the US implicit support of a weak yen while Japan undergoes reforms, says JP Morgan currency strategist Rebecca Patterson.

"One risk the market is focused on is if Bush is not convinced and the tone from the US on dollar/yen changes," she said.

Rising US trade deficit

Analysts expect the US trade deficit to have risen to $28.5bn in December. Part of that rise is attributable to a widening trade gap with Japan.

As the dollar moves higher against the yen, Japanese imports become less expensive in the States, which in turn increases the US trade deficit.

That is a concern for US auto makers who already face stiff competition from Japanese manufacturers.

A trade organisation representing the Big Three auto makers believe Japan is doing little to stabilise its currency and is calling on President Bush to put pressure on Tokyo to undertake concrete efforts to stop the yen's fall.

"We would certainly urge the president to tell Japanese officials that the US does not support Japan's policy, its strategy of pushing the yen down as a substitute for undertaking the urgent internal restructuring and reforms," said Stephen Collins of the Automotive Trade Policy Council.

Mr Collins told BBC News Online that the Bank of Japan's intervention on behalf of the yen in the past year, as well as Japanese officials' complicit support of a falling yen, have shown the country's strategy is to use the yen "as an export mechanism to delay reform".

Despite automakers' views, economists expect there is little Mr Bush can do. The dollar's strength against the yen is largely a product of global confidence in the US currency, they say.