JIN-258 -- Japan's Intervention Junkies -- Addiction Without End?

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Issue No. 258
Wednesday, January 21, 2004

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@@ VIEWPOINT: Japan's Intervention Junkies -- Addiction Without End?

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@@ VIEWPOINT: Japan's Intervention Junkies -- Addiction Without End?

JAPAN'S Ministry of Finance has lost more than 70 billion dollars in
the past financial year trying to bet against currency speculators.
Cabinet Office insiders admitted on Tuesday that the currency losses
have spiralled out of control, after a renewed attempt by the Finance
Ministry to prop up the dollar and talk down the value of the yen.

The insiders told us that losses in a special ministry account that holds
the government's intervention reserves are expected to soar to 7.8
trillion yen (70 billion dollars) by the end of the financial year.

This month the government has already spent a record sum trying to prevent
the yen from rising too high against the dollar, a movement that would
hurt Japan's all-important exporters -- on whose prosperity all hopes
of an economic recovery are pinned.

However, in trading in Tokyo yesterday it was clear that Japanese
exporters were also preventing the massive currency intervention program
from succeeding. As the yen fell to 107.5, a number of carmakers were
understood to be dumping large amounts of their foreign-earned dollars
on the market.

When the ministry's huge losses are officially confirmed later this year,
Junichiro Koizumi, the Prime Minister, will face pressure to prove that
his controversial currency intervention strategy is working.

The battering to the ministry's foreign exchange account arises because
the department is selling its own currency for dollars. As the value of
the greenback continues to plunge, so too does the value of the dollars
that the Japanese government has already purchased.

At the start of fiscal 2003, the ministry assumed an average exchange
rate of 121 yen to the dollar. That was revised up to 115 in November.

Last week, the yen rose to just over 105.

The special account's paper losses will be realized once the ministry
begins to unwind its huge holdings by selling dollars at these lower
levels in exchange for yen. However, currency analysts we contacted
yesterday suggested that the outlook for the dollar/yen exchange rate
looks set to favor a continued slide in the greenback. This means that
Japan is likely to continue accruing vast paper losses.

One currency broker in Nomura, the Japanese securities house, told us:
"The (ministry) is like an intervention junkie at the moment. The effect
of each shot of dollar buying is getting less and less, which means the
shots have to be bigger and bigger. The odd shock move makes only a very
temporary difference."

Japanese monetary authorities have effectively confirmed that the losses
will not deter them from trying to swing the currency markets. So far this
year, the Bank of Japan (BoJ) has bought an estimated 20 billion dollars,
and officials have assured markets that the intervention will continue.

In a surprise move yesterday, the BoJ eased monetary policy in what some
economists said was an attempt to offset the failures of its intervention
efforts. The central bank raised its liquidity target under its
quantitative easing policy by 3 trillion yen to a new range of 30 trillion
to 35 trillion yen, a margin that gives the BoJ scope to help the finance
ministry's battle against the rising yen.

However, beyond that measure, analysts and BoJ sources have pointed out
that Japan does not, in fact, have many policies to choose from -- beyond
more costly intervention. The BoJ has virtually no scope for serious
monetary easing, and Mr Koizumi's structural reform program has tied the
ministry's hands in piling on more fiscal spending.

-- The Editors

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Written and edited by Roland Kelts and
Leo Lewis (editors@japaninc.com)


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