Asia Times: Dollar rises vs. yen for 2nd day on speculation Japan slowdown to persist



	April 23, 1999	atimes.com

Japan Economy

Dollar rises vs. yen for 2nd day on speculation Japan slowdown to persist

London - The dollar rose against the yen for a second day Wednesday as reports from Japan's Ministry of Finance and the International Monetary Fund reinforced concern a Japanese economic recovery may still be far off.

The Ministry of Finance said Japan's economy is still in a ''severe state.'' That followed an IMF report saying the economy will contract this year.

''The Japanese economy is clearly continuing to deteriorate,'' said Chris Hartley, who as co-head of global fixed income at Foreign & Colonial helps oversee 6 billion pounds ($9.6 billion). ''We don't think that scenario is compatible with the dollar below 120 yen. It should head back toward 130 in the next 6 to 12 months."

The dollar rose as high as 119.30 yen in European trading from 118.35 yen late yesterday, and was recently at 119.16.

The U.S. currency was little changed against the European Union's common currency, with the euro at its lowest level since its inception. The euro fell as low as $1.0590, its weakest yet, and was recently at $1.0603, compared with $1.0620 late yesterday.

The euro was hurt after the IMF also lowered its growth forecast for the 11-nation euro region and NATO forces continued a bombing campaign against Yugoslavia, keeping investors leery of euro assets.

Adding to the gloomy outlook for Japan, Japan's Economic Planning Agency Directo-General Taichi Sakaiya is concerned the economy will worsen when the current round of government spending dries up after September, said Ichizo Ohara, a member of parliament from the ruling Liberal Democractic Party and a political adviser to Prime Minister Keizo Obuchi.

''The Japanese economy is going to fall off a cliff once the government stops spending money,'' said Stuart Trow, senior manager of market analysis at Norinchukin International Ltd. That's ''more bad news for yen assets and I would be surprised if the yen were to appreciate from current levels."

The dollar's rally against the yen began yesterday after the IMF warned that Japan's economy, the world's second-largest, will contract 1.4 percent this year after shrinking 2.8 percent last year. It urged Japan to do more to stimulate its economy through monetary and fiscal means.

''The IMF still looks at Japan as being weak,'' Gloeckner said. Although Japan is showing some signs of recovery, ''people are still bullish on the dollar'' versus the yen, he said.

Japanese officials, as part of an effort to spur recovery, repeatedly have warned that they may sell yen to keep the currency from rising too much.

A rising yen increases the price of Japanese exports, can trim manufacturers' overseas earnings and could make it hard for Japanese stocks to extend the rally that's lifted the benchmark Nikkei 225 index 22.95 percent this year.

Eisuke Sakakibara, the vice finance minister for international affairs, said Monday that Japan ''will take decisive action against the yen's premature and excessive rise."

Still, the dollar's gains were checked by Japanese exporters who took advantage of the dollar's one-day, 1 percent increase and sold the U.S. currency to bring their overseas profits home.

''Whenever the dollar rebounds significantly, Japanese exporters sell dollars,'' said Kenichi Hayashi, a foreign exchange manager at Industrial Bank of Japan Ltd. in Tokyo. He said he expects the dollar to trade between 115 yen and 120 yen this month.

The dollar also may be held back against the yen amid sales of euros for yen, traders said. Some euro-yen trades go through the dollar, meaning traders sell euros to buy dollars, then sell those dollars to purchase yen.

''Euro-yen is going to go down'' and that could cap gains in dollar-yen, said Jamie O'Neill, a senior trader at First Union Corp. ''People are getting out of European investments."

Between April 8 and the beginning of this week, the euro tumbled 4.5 percent against the yen.

Traders were loath to buy euros after the IMF, in its World Economic Outlook, said it expects the euro region to grow 2.0 percent this year, less than the 2.4 percent it expected in December. The agency also suggested the 50 basis point interest rate reduction by the European Central Bank this month may not be all that's needed to get the region back on track.

Such expectations of slowing growth, combined with the war in Kosovo, could keep the euro from climbing any time soon, traders said.

''The economic outlook is still not as bright as we would like,'' said Gloeckner. ''As long as the war is rolling along, I cannot see any increase for the euro."

A bombing campaign by North Atlantic Treaty Organization forces, aimed at forcing Yugoslavia to withdraw forces from Kosovo and allow refugees to return, began March 24. The euro lost 2.6 percent of its value since then as some investors, concerned the war will make it harder for the region to rein in budget deficits, shunned euro-denominated assets.

(Bloomberg)

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