JIN-276 -- Slip Sliding Away -- Oil and the Dollar

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Commentary on the Week's Business, Technology and Cultural News
Issue No. 276
Thursday, June 9, 2004

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@@ VIEWPOINT: Slip Sliding Away -- Oil and the Dollar

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@@ VIEWPOINT: Slip Sliding Away -- Oil and the Dollar

It never ceases to amaze us how seldom the issue of oil supply is
properly debated in Japan. Plenty of older business leaders remember --
and unremittingy refer to -- the miseries of the "oil shocks" of the
70s. But they do so with the clear implication that things are much more
stable now. In a sense, of course, they are right. Opec is an
altogether less truculent and reactionary organization than it used to
be, and the past two decades have been mercifully free of the sort of
fuel panics that had factories turning off the machines and worried
members of the public filling their bathtubs with gasoline.

But recent events have clearly shown that Opec doesn't quite have the
muscle it would like to believe it wields. The cartel has long abandoned
its ideal "price band" and has been forced to accept that oil speculators
now have a control over crude prices that exceeds Opec's short-term
ability to move the market with production rises and cuts. But what
does all this have to do with Japan -- a country that imports 100 percent
of its oil and relies heavily on the US to keep the overall flow of the
black stuff as smooth as possible?

There are two answers, and both of them suggest rather strongly that
Japan is paralytically terrified of $40-plus oil. The first response is
something we have written about on numerous occasions -- Japan's long-term
fascination with alternative fuels. Japanese car companies are
diverting enormous funds into research on fuel cells, and other
industries are looking at ways to have homes, offices and PCs powered
by hyrdogen. A vast trade conference on the subject is due to begin in
Tokyo next month.

More profound, however, is the whispering we hear from the Bank of Japan
(BoJ). The BoJ's multi-trillion yen efforts to support the dollar in favor
of Japanese exporters has now decisively ended. There were various reasons
why the manipulation had to end -- but there are fewer obvious explanations
for the Ministry of Finance's (MoF) total lack of reaction to the
suggestion that the dollar may soon plunge.

The real reason, we gather from the corridors of Nihombashi, is related
to oil.

The MoF has lost none of its drive to protect Japanese companies and,
therefore, the wider economy. At the moment, that means letting the
greenback slide. Cheaper dollars mean that the pain of buying dollar-
denominated oil is at least slightly assuaged.

-- The Editors

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


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