The Yen's Weakness Is The Greenback's Strength
Tuesday, March 20, 2007PAUL KANGAS: The governor of China's central bank today suggested his nation could stop accumulating foreign exchange reserves. If true, that could mean China is moving to float the yuan more freely, a move Washington has advocated. China's undervalued currency makes Chinese exports more competitive against U.S. products. China's neighbor, Japan, also has a weak currency, helping it sell cars and game machines. But Lucy Craft reports, Washington isn't complaining about that currency situation.
LUCY CRAFT, NIGHTLY BUSINESS REPORT CORRESPONDENT: Sizzling may not be the best description for Japan's moderately expanding economy but, so far, there's no end in sight for the longest-sustained spate of growth since World War II, now over five years old. Growing economies, the textbooks say, are supposed to breed strong currencies. Yet despite Japan's steady growth, the yen has sunk to lows against the dollar not seen in years. In fact, when adjusted for inflation, the yen is weaker now than it was back in the 1980s, when the currency issue became a source of trade friction. The yen is down about a third from its peak value, reached in the mid-1990s. But this time around, grumbling in Washington about the flaccid yen -- a huge windfall for Japanese exporters, because Japanese goods become more competitive overseas -- has been conspicuously muted says Nomura Securities economist Shuichi Obata.
SHUICHI OBATA, ECONOMIST, NOMURA SECURITIES (THROUGH TRANSLATOR): In the past, Japan accounted for 80 percent of the U.S. trade deficit. But now China has replaced Japan as the main source of the trade gap. And Japan has opened its market considerably since the 1980s, while China still manages its currency. So that's a big difference.
CRAFT: Ironically, says Morgan Stanley economist Robert Feldman, the weak yen benefits U.S. interests in at least one crucial area.
ROBERT FELDMAN, SR. ECONOMIST, MORGAN STANLEY: Japanese hold a lot of U.S. bonds, and if the U.S. beats up on Japan about the exchange rate and then the dollar weakens, the yen strengthens, then Japanese would be less willing to hold U.S. bonds. U.S. yields would go up. It's probably not good either for the U.S. economy or for the politics of the U.S. administration in power, so I think that's also part of the story.
CRAFT: The key to the weak yen, Japan's super-low interest rates. At just half a percent, Japan's benchmark rate is well below that of the U.S., Euro zone and every other rich country on the planet. Near-rock bottom interest rates mean pathetic returns for Japan's long-suffering investors. Now, says Nikko Citigroup strategist Masafumi Yamamoto, even the most conservative of Japanese retail investors are going offshore to seek reasonable yields -- an exodus bolstered by the stronger Japanese economy.
MASAFUMI YAMAMOTO, CURRENCY STRATEGIST, NIKKO CITIGROUP: Individuals feel less uncertainty about their jobs or the wages, so in essence they feel like they can take more risk in investment.
CRAFT: Meanwhile, foreign investors are exploiting the wide gap in interest rates between Japan and the rest of the rich countries, a financial phenomenon known as the "yen carry trade," notes Obata.
OBATA: For foreigners, Japan is a place to procure funds, rather than an investment destination.
CRAFT: Japan's monetary policy Yamamoto says is expected to keep the yen trading in a narrow range throughout 2007.
YAMAMOTO: We think that the BOJ can hike only once this year. So, at least this year, we think that the yen remains weak.
FELDMAN: Say the nominal interest rates in Japan go up by another percentage point, 100 basis points. We still have quite a significant interest rate differential vis a vis Japan and other countries. So I don't think it would staunch the outflow of capital. It might crimp it a little, but probably not that much.
CRAFT: And as the central bank moves cautiously, nudging up rates on average twice a year, Japanese investors are expected to keep seeking better returns abroad and keeping the yen down. Lucy Craft, NIGHTLY BUSINESS REPORT, Tokyo.
