Japanese experts comment on dollar prospects

These were the views expressed by three Japanese experts - former financial vice minister and Bank of Tokyo chairman Toyoo Gyohten, former Bank of Japan (BoJ) director Rei Masunaga and JP Morgan Chase bank foreign exchange strategist Tohru Sasaki - during a panel discussion at the Foreign Correspondents Club of Japan on December 17. They also squashed the idea that Asian central banks are likely to "dump dollars" in 2005.

Gyohten (who nowadays is president of Japan's Institute for International Monetary Affairs) said he expected further dollar depreciation in 2005 - but that this would do little to correct the gaping US current account deficit. The US industrial structure has shifted so far away from manufacturing and toward services that US industry is incapable of supplying enough goods to meet consumer demand, and imports sucked in as a result, he argued.

The US deficit will keep on expanding until the Bush administration takes steps to cut demand and raise household savings, as well as reining in the federal budget deficit. Asian governments meanwhile must contribute toward reducing the US deficit by expanding domestic demand and reducing reliance on exports. But foreign exchange markets have little confidence that these things will happen, so they will do the job by depreciation the dollar, he added.

Sasaki (a former foreign exchange dealer at the BoJ) projected a drop in the dollar/yen exchange rate to 95 or lower for most of next year, and warned that the dollar could crash to 65 to the dollar if trade frictions erupt as foreign exchange markets struggle to compensate for lack of current account-balancing policies. With much diminished private capital inflows into the US now, the reliance upon official flows from Asian central banks to finance the US deficit has become extreme. But even this has dried up recently.

Intervention by the BoJ could resume, suggested Masunaga, if a dollar fall threatened to become so severe as to seriously jeopardise the value of Japan's holdings of $720 billion in US Treasury securities. China too could resume interventions, for similar reasons, he suggested and, as the economies of both Japan and China are slowing, dollar-buying and money supply-expanding interventions would not conflict with domestic monetary policy

Depending upon how turbulent foreign exchange markets become in the New Year, there could possibly be joint interventions by the ECB and the BoJ in support of the dollar, speakers suggested, although Europe will probably have less incentive to intervene than Japan if the yen takes pressure off the euro. The US Federal Reserve might possibly enter the market too in a global intervention if things get too bad (employing its US foreign currency - though not gold) reserves to finance any intervention, it was suggested.

Anthony Rowley, arowley@inter.net