Wednesday, January 13, 1999 Published at 01:58 GMT
Business: The Economy
Rising yen leads to trade tensions
Dramatic moves on the currency markets as the Bank of Japan intervenes
The wild fluctuations in the exchange rate between the dollar and the yen are increasing trade tensions between Japan and the US.
The US is already getting tough over trade arrangements with the European Union. It is threatening sanctions aginst EU member states as a result of an escalating argument over banana imports.
Steel imports from Japan have surged this year, contributing to a $60bn trade gap between the US and Japan.
The US has been trying to open the Japanese markets to foreign goods for years, but has been frustrated by a lack of co-operation and more recently by the high dollar which has made US products uncompetitive.
Yen too high for Tokyo
That has changed recently as the dollar has begun a dramatic fall against the yen over the past few months - a trend that accelerated in the New Year.
By Monday the yen reached a 26-month high of ¥108.2 to the dollar - a 35% increase since the summer.
Now the strength of the yen has forced the Bank of Japan to intervene in the currency markets, driving the rate back to ¥112.50 to the dollar on Tuesday.
The move came after Japanese finance minister Kiichi Miyazawa said he was "carefully watching moves in the yen in domestic and overseas markets".
The Japanese economy is still in recession, although the government has produced a plan to bail out its debt-ridden banks. A strong yen will make it harder for the economy to recover through export-led growth, as it makes Japan's exports more expensive.
But the US fears that bringing back a lower yen would help Japan export even more to the US, increasing the US trade deficit.
US Treasury Secretary Robert Rubin re-affirmed the US commitment to a strong dollar and denied that the US was willing to see the dollar weaken in order to help its trade problems.
"I don't think we should use the dollar as an issue of trade policy," he said.
The yen has been rising because the difference between interest rates in the US and in Japan have been narrowing.
Tthe very fact that Japan's recession has forced its government to spend billions in an economic rescue package is helping the yen's rise. It has led to higher interest rates on Japanese Government Bonds (JGBs) which have attracted some investors.
Higher interest rates have also led to a decline in the speculative "yen-carry trade" which involves hedge funds borrowing in cheap yen and investing in higher-yielding dollar assets.
Dollar in trouble
The most fundamental reason for the strengthening of the yen has been the weakness of the US dollar.
The US dollar is in trouble - the US has a huge trade deficit with the rest of the world - more than $200bn (£125bn) in 1998 - which is likely to grow even bigger in 1999. Both Japan and the eurozone, in contrast, are running big trade surpluses.
"The markets have woken up to the realisation that the US current account deficit is getting larger and unsustainable," according to Gerard Lyons of DKB International.
The Japanese vice-minister for international finance, Eisuke Sakakibara, has described the US economy as "bubble-like", just like the Japanese economy was in the 1980s.
The US economy is expected to weaken sharply in 1999 and any further economic crisis in Latin America would hit the US hard.
The Japanese Government has become increasingly worried about the rise of the yen.
Taichi Sakaiya, head of Japan's Economic Planning Agency, said the yen was at an "inappropriate level".
Prime Minister Keizo Obuchi has been in Europe trying to get support for a degree of co-ordination on exchange rates following the launch of the euro.
Last Thursday, he issued a joint statement with President Chirac calling for "a renewed framework for mutual co-operation on exchange markets, including strengthened mutual dialogue on macroeconomic policies."
But dealers were sceptical about the prospects for target zones, which are opposed by the US. The currency fluctuations are bound to be discussed in a meeting of G7 finance officials and central bankers in Frankfurt.
"True stability of the yen in the foreign exchange market can only be achieved by restoring confidence in Japan itself." said Hitoshi Imamura of Nippon Credit Bank.
For the moment, the volatility of the yen has been increasing as the currency speculation is increasingly driving its level. Some dealers believe that the launch of the euro made this worse. "Speculators are playing around with the yen more as they had to adopt a more cautious attitude to the new currency," said one dealer at a major Japanese city bank.
The decline of the dollar, if it continues, could exacerbate trade tensions with Europe and Japan, weaken the worldwide economic recovery, and precipitate a capital flight from the US. It could be one of the most significant economic events of 1999.
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