A Too-Rapid Fall Threatens to Destabilize the Fragile Economy : Tokyo Backtracks on Weak Yen
International Herald Tribune
January 11, 2002
Eric Pfanner 

Japanese officials raised a warning Thursday about the swift and sharp decline of the yen just weeks after the government started talking the currency lower in a last-ditch effort to pull the economy out of its decade-long slump.

Though the concerns expressed by Finance Minister Masajuro Shiokawa and another senior Finance Ministry official helped stabilize the Japanese currency for a day, analysts said that the slide would resume quickly unless traders got more explicit signals from Tokyo. The yen has fallen more than 10 percent in the past two months, with the decline accelerating in recent days.

"It looks like there's a bit of coordination going on to at least slow down the yen," said Tony Norfield, senior currency strategist at ABN AMRO in London. "They don't want to see it weaken as rapidly. It doesn't necessarily mean they don't want it to weaken."

The mixed signals over the speed of the yen's decline reflect the government's apparent paralysis in the face of a deepening economic slide.

Though a weaker currency would make Japanese exports cheaper, perhaps giving the economy a boost, the rapid fall in the yen risks further destabilizing the troubled financial system, analysts said. If the decline in the yen turned into a freefall, it could generate a "sell Japan" mentality in the financial markets, prompting precipitous drops in the stock and bond markets and putting further pressure on beleaguered Japanese banks.

Those worries apparently prompted Mr. Shiokawa to speak out. In response to a question about the yen's decline, he said: "I feel the speed is a bit fast."

Zembei Mizoguchi, a senior Finance Ministry official, added, "I am concerned over a rapid weakness in the yen and as a result we will keep watching the forex market closely."

Earlier in the week, however, Economy Minister Heizo Takenaka said that a weaker yen was appropriate given the problems in the Japanese economy.

He spoke in Washington after meeting with Treasury Secretary Paul O'Neill and Lawrence Lindsey, the White House economic adviser, leading traders to conclude that Washington would not oppose Tokyo's policy of talking down the yen.

"Traders will continue to test the market," said Neil MacKinnon, senior currency strategist at Merrill Lynch & Co.

For that reason, analysts said, the response to the latest comments Thursday was muted, with the dollar slipping to ¥132.64 at the close in New York from ¥132.89 late Wednesday.

"The reaction in the forex market was a hiccup," Mr. MacKinnon said. "Investors will need more of a red flag from the Ministry of Finance" before sending the yen in the other direction.

Mr. MacKinnon said the comments by the Finance Ministry officials may have been aimed at giving Prime Minister Junichiro Koizumi some political breathing space as he visits Southeast Asian capitals this week.

Some Asian neighbors and trade rivals of Japan have complained about the decline in the yen, which puts pressure on them to follow suit or risk losing export market share.

A spokesman for Mr. Koizumi said that the Japanese leader had told Prime Minister Mahathir bin Mohamad that "we are not intentionally lowering" the yen.

"It is something that the market should decide," the spokesman said at a news conference.

Many market participants have decided that a weaker yen is here to stay. Mr. MacKinnon predicted the dollar would soon rise to ¥140.

Strategists at BNP Paribas SA expect the dollar to reach ¥145. Some analysts think a much sharper rise — to ¥160 or even ¥200 — cannot be ruled out.

"They've tried virtually everything to get the economy going other than a weaker yen," Mr. MacKinnon said.

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