- The Washington Times - Tuesday, September 30, 2003

Japan moved yesterday to prop up the dollar in an effort to protect its budding economic recovery and export market in the United States, defying a week-old agreement with the U.S. Treasury and Group of Seven nations not to intervene in the exchange markets.

The Bank of Japan stepped in and bought dollars through the Federal Reserve Bank of New York when the dollar skidded toward the 110 yen level that analysts say is a critical threshold for Japanese exporters trying to sell cars, cameras and electronics in the United States. An export boom in Japan this year has fueled unexpectedly robust economic growth, and Japanese exporters fear the sagging dollar will cut short the recovery.

“The pain under 110 is too much for them to handle and keep their economy alive,” said Larry Brickman, a currency strategist at Bank of America Corp. “Their main policy tool is to keep a weak yen and keep the economic recovery sustained.”

Japan’s dollar buying began in Asian trading Monday night and accelerated yesterday after the dollar fell to a three-year low of 110.12 yen in early New York trading on news of a drop in U.S. consumer confidence and Midwest manufacturing activity. The transactions between Japan and the Federal Reserve Bank of New York boosted the greenback to 111.47 yen by the close of trading.

Japan’s defiance of the G-7 agreement has potentially far-reaching implications, as the Asian economic giant is seen as setting an example for China. The Bush administration has been pressuring China to stop artificially depressing the value of its currency to make inroads into U.S. markets.

President Bush yesterday repeated his call for China to establish a “fair” exchange rate after a meeting with Chicago political and business leaders, but did not mention Japan.

Japanese authorities added emphasis to their intervention yesterday by revealing that they spent a record $40 billion in the month ended Friday, and an unprecedented $122 billion this year, buying U.S. dollars and bonds.

In doing so, they have financed a lion’s share of the burgeoning U.S. trade and budget deficits.

The acknowledgment shocked the markets, as it meant Japan was buying dollars furiously even as it signed on to the G-7 statement pledging to let the markets set the value of exchange rates. Dollar traders and analysts around the world had interpreted the G-7 agreement as a concession by Japan to U.S. Treasury Secretary John W. Snow and European leaders who wanted Japan to stop artificially depressing its currency to maintain the competitiveness of its exports.

European leaders said they expected the agreement to usher in a decline in the dollar, which immediately fell nearly 5 percent against the yen after the G-7 meeting. But Japanese officials said that despite the pledge they were reserving the right to “take appropriate action” if they believed Japan’s interests were threatened.

The sharp drop of the dollar after the G-7 meeting precipitated a 6 percent plunge in Tokyo’s benchmark stock index, the Nikkei, on fears that it would cut short Japan’s export boom.

Mickey Levy, chief economist with Bank of America Securities, was not surprised that Japanese authorities decided to put a stop to the rapid erosion of the dollar.

“A sharp appreciation of the yen may halt Japan’s economic recovery,” he said. A dramatic fall in the dollar also risks setting off a global financial crisis because it could spark a run on U.S. dollars and bonds, driving up U.S. interest rates and threatening the U.S. economic recovery as well as Japan’s, he said.

While the allure of a lower dollar is strong — it helps preserve U.S. export markets and manufacturing jobs — many analysts say Japan is serving U.S. interests by helping to finance its record $450 billion budget deficit and $500 billion trade deficit, while keeping interest rates low. Japan already is the largest foreign holder of U.S. Treasury bonds.

“Japan’s increased dollar buying is helping to move the U.S. economy toward recovery” by helping keep interest rates low, even as it sustains the likelihood of recovery in Japan, said John Makin, economist with the American Enterprise Institute.

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