Currencies Dollar hits 27-month low against yen
By Paul Abrahams in Tokyo and Alan Beattie in London
The US dollar fell to a 27-month low against the yen in Europe and the US yesterday after Eisuke Sakakibara, Japan's vice finance minister for international affairs, said the US economy looked "bubble-like", that stock prices would fall and growth would slow.
Mr Sakakibara, known as "Mr Yen" for his ability to move the currency markets, explained in an interview in the Nihon Keizai newspaper that the value of the two currencies would depend on the economies' relative strengths.
"The US economy has entered a phase of slower growth. Should the Japanese economy pick up from the middle of the year, the basic trend will be toward a stronger yen," he said. Combined with higher recent Japanese government bond yields, which have become more attractive compared with US Treasuries, the comments helped depress the dollar to Y110.4 during London trading. In New York it hit Y110.46, but stood at Y111.305 in late trading.
The spread between the yield on 10-year JGBs and 30-year US Treasuries has narrowed 75 basis points (0.75 of a percentage point) since October to 325 points.
In London, the dollar's performance against the yen relegated the second day of trading in the euro to a sideshow.
Analysts were sceptical about the Japanese government's explanations for the yen's rise and said its strength, far from being welcome, was evidence that the Japanese authorities had backed themselves into a corner.
"The Bank of Japan shows no inclination to buy JGBs," said Cameron Crise, currency strategist at Warburg Dillon Read in London, "so the massive bond issuance to fund the government's fiscal stimulus programme is simply driving up long-term interest rates and causing the repatriation of capital. This is pushing up the yen."
Analysts said that the weakness of the Japanese economy, now further threatened by a strong currency, meant the yen was likely to weaken in the longer term. But given the Bank of Japan's unwillingness to print money, the economy might well have to implode to bring this about, they said.
Ken Landon, currency analyst at Deutsche Bank in Tokyo, said the interview with Mr Sakakibara was significant because it indicated that the official in charge of currency policy was giving a nod to a strengthening of the yen, even from these levels. This was important because, in June 1997, when the yen had reached 110.65, Mr Sakakibara had said he did not want the yen to strengthen any further.
The yen's rise hit exporting companies' stocks and the benchmark Nikkei 225 average closed down 1.3 per cent at 13,232.
Nintendo, the computer games maker, warned it would struggle to make a profit at parent level if the yen remained at its present strength. However, Takashi Imai, head of the Keidanren, Japan's biggest business lobbying organisation, said if the yen remained between Y110 and Y120 against the dollar it would be acceptable.
Mr Sakakibara admitted that if the yen strengthened too much it would harm the Japanese economy. But he warned: "Japan cannot export its way out of the economic slump given the state of Japan-US relations."
Keizo Obuchi, the Japanese prime minister, is expected to raise the issue of exchange rate management of the world's largest currencies during his trip to Europe which starts today. Japanese ministers have recently called for "managed flexibility", setting loose targets to stabilise the currency market.