Thu, May 23, 2002 page19

• Tokyo steps into forex market -- now what?

  Weakening the yen isn't a long-term solution to Japan's problems, and the policy seems to be designed to ensure the economy doesn't implode on Koizumi's watch

  • By William Pesek Jr / BLOOMBERG
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  Whether he knows it or not, Junichiro Koizumi's job as prime minister became harder yesterday. For that, he has his currency to thank.

  Japan intervened in currency markets to halt the yen's 2.6 percent rise this week against the US dollar. Even more surprising than its move to sell yen was the logic behind it, or lack thereof. Koizumi, already getting battered in the polls for domestic reasons, will now face even more international ire.

  

  Japanese women with a parasol pass in front of a foreign exchange rate board in downtown Tokyo yesterday. The US dollar was traded at ?125 after Japan intervened in the exchange market in Tokyo, selling Japanese yen for the dollar in a bid to curb sharp gains in the Japanese currency.

  PHOTO: AFP

  The argument Koizumi must make is this: We're confident Japan's 18-month recession is over, but now we must weaken the yen -- even if it hurts others in Asia -- to boost the economy.

  Tokyo's beggar-thy-neighbor strategy won't win it many fans around Asia, or in the halls of power in Frankfurt, London or Washington. At a time when the world is calling on Japan to fix the crisis-waiting-to-happen that is its banking system, officials here are again turning to a weaker yen to boost exports.

  Pity poor Koizumi having to take this argument to next month's G8 summit in Kananaskis, Canada. But then, he and his team brought it on themselves. The yen has been surging since Friday, when Japan upgraded its economic assessment for a third straight month. Investors poured into the yen, pushing it to a five-month high against the dollar.

  Even though Japan's economy remains closer to depression than long-term recovery, Koizumi is determined to convince a doubtful world he's succeeded in reviving things. The tactic is more about spin than reality and it's already blown up in Koizumi's face. His optimism boosted the yen. Trouble is, the only reason the economy is showing signs of life is the decline in the yen officials engineered last year to pump up exports.

  Now, Koizumi's Cabinet is being exposed for what it is: Another group of politicians trying to avoid a meltdown until they leave office and drop Japan's problem on someone else's desk.

  Today's foray into the foreign-exchange markets was clear evidence that Finance Minister Masajuro Shiokawa is no closer to stabilizing Japan's financial system than his predecessors.

  That said, it's hard to keep a straight face when Shiokawa announces: "We have taken appropriate action today in the exchange market. Recent movement of the exchange rates has been too rapid. We will continue to closely monitor the market and take appropriate action as necessary."

  Ever notice that "appropriate action" isn't taken when the yen is plunging? When the yen's sliding, increasing Japan's competitiveness, Tokyo has no time to think about currency trends.

  Then, it's "the markets decide foreign-exchange rates, not us." And when Asian neighbors warn that a falling yen is a problem for them, Shiokawa pretends to be above it all.

  "I haven't heard those concerns voiced directly, so I'm not aware of such things," he said in January when China, South Korea and Malaysia asked Tokyo to stop talking down the yen. "It is a great misunderstanding for them to think we are guiding the yen weaker."

  No one's arguing a weaker yen hasn't helped in recent months.

  A government report yesterday showed the world's second-biggest economy probably grew for the first time in a year in the first quarter, led by rising exports of cars and an increase in factory production. Trouble is, 100 percent of that improvement is a soft-yen story. If the yen rises, growth and corporate profits disappear.

  Tokyo's obsession with the yen isn't hard to understand.

  Restoring Japan to long-term health will mean forcing banks to write down trillions of dollars of bad loans and allowing myriad deadbeat companies to fail. Unemployment will rise.

  It'll also mean introducing competition where there's none, wreaking havoc in protected industries. Notice that Japan's only free-trade agreement is with tiny Singapore. Why? The island nation of 4 million has no agricultural sector and, therefore, isn't a threat to one of Japan's most protected industries.

  In short, repairing the economy will require pain and determination not seen since 1945, when Japan began rebuilding after World War II.

  Lowering the yen is a means of putting off that pain for another few years -- and holding Japan Inc together for a few more quarters. Like Enron Corp CEO Jeffrey Skilling jumping ship when the jumping was good -- just before Enron sank -- folks here don't want the economy to implode on their watch.

  Problem is, it's a distraction. At the very least, the inordinate amount of time and energy Japan spends guiding the currency tarnishes its capitalist credentials. At worst, it distracts attention from the nation's real problems. Until banks write down bad loans and companies restructure, Japan will experience anemic growth and a weak stock market.

  Of course, Tokyo's efforts to weaken the yen anew may not work. The US dollar may be in for a sharp downward correction.

  Admittedly, analysts have predicted the dollar's demise every year since 1995 -- one that's never come. This time, however, the dollar could be in for a rocky year.

  One reason is fear the US recovery may not help asset markets very much, encouraging investors to look elsewhere. Even the long-suffering euro is rising these days -- a sign of how wobbly the dollar has become. Another is that Treasury Secretary Paul O'Neill isn't as attached to Washington's "strong dollar" policy as his predecessors.

  Whatever happens with the dollar, Tokyo has reminded the world a weak yen is in Japan's best interest. It's sticking with that view no matter how disingenuous it makes Tokyo look.
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