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Wednesday, September 15, 1999 Published at 11:16 GMT 12:16 UK

Business: The Economy

No yen for intervention

Currency dealers see the yen as a one-way bet

The yen rose to a 3-year high against the dollar as the US trade deficit hit a record high.

The US current account deficit for the second quarter of 1999 reached $80.7bn (£49.7bn), up from the $68bn in the first quarter of the year.

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As a result the yen moved above ¥105 to the dollar for the first time since May 1996. By 0730GMT the yen was trading at 104.97, a drop of more than one yen.

The Bank of Japan intervened for the second time in a week to try and stabilise the currency, but dealers say its sales of around $1bn-$2bn worth of yen had little effect.

Fears of capital flight

The fall in the dollar is being driven by fears that foreign investors will withdraw money from the over-valued US stock market and put it into foreign securities, especially in Japan, where the Nikkei index enjoyed strong growth this year.

Japanese investors, who have funded much of the US trade deficit by buying US government bonds, are believed to be repatriating substantial amounts of capital.

"Foreign investors are asking themselves why they should keep funding the US to consume itself silly," said Tony Northfield of ABN Amro Bank.

The falling dollar could itself precipitate a sharp drop in the US stock market, which has been boosted in the past year by a massive influx of foreign funds and the strong dollar.

A weaker dollar reduces the value of any foreign stock holdings, thus making them less attractive.

Need for coordinated action

The Japanese government is desperate to stem the rise of the yen, which will make many of its large export-oriented companies unprofitable.

But it is hampered by the lack of international support for its efforts, and internal disagreement between the Bank of Japan and the government.

The US Treasury Secretary, Lawrence Summers, has made it clear that although he supports a strong currency, he will not intervene to boost the dollar at the present time.

The rise in the yen may be politically expedient as the US presidential election approaches - weakening Japanese exports which have often been accused of putting American manufacturing jobs at risk.

Meanwhile the Bank of Japan is refusing to consider expanding the money supply as part of its intervention to weaken the yen.

Government officials would like Japan to print more and more yen for use in the foreign exchange market, adding to their plans for more spending to boost the economy.

But instead the Bank buys back any yen it has sold later, to prevent any inflationary impact.

Taichi Sakaiya, head of the Economic Planning Agency, said the cabinet would discuss "strong measures" to stop the yen strengthening, "including monetary policy as one aspect of our economic policy."

The governor of the Bank of Japan has threatened to resign if the government undermines its independence.

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