For some months international investors have been drifting back to Japan. They reckon that risutora,...
For some months international investors have been drifting back to Japan. They reckon that risutora, or corporate restructuring, is a very good thing. They don't hold with the namby-pamby jobs-for-life social contract which successive Japanese governments have made with their people. They certainly can't understand why unemployment at 4.8% (a post World War Two high) is any cause for worry, or any sort of shame.
Younger Japanese entrepreneurs tend to agree with the western investors. They think restructuring and deregulation are good for their new 'concept' service businesses. They don't want or need the social security net promised to loyal salarymen by the old monolithic companies. All they want is for interest rates to remain around their present level of zero, a little price inflation to get things moving, and a healthy but disciplined yen.
If they are lucky, they will receive most of what they wish for. Bar the last. The Japanese currency is appreciating faster than even the optimists thought possible and is now beginning to cause all sorts of problems and not only in Japan. For months investors have been told that the Bank of Japan wanted the currency to follow the economy as economic growth picked up, so the yen would follow, giving exporters a chance to get back on their feet.
It hasn't happened that way. The yen appreciated 35% against the dollar between August 1998 and January 1999, from 140/$ to around 125/$. There were squeaks then about the Bank of Japan (BoJ) intervening too little and too late. The whole issue was clouded by 'yen diplomacy' meaning Japan's national pride required some sort of a stand against the nation's commercial rival, the US, and also against the new Pretender to world currency status, the euro.
Last week the yen soared to 111/$. This means Japanese banks can more easily meet international capital adequacy requirements, which is fine for them but hardly touches the heart of the ordinary investor. It raises Japanese real incomes, which might prompt greater spending, as long as companies themselves are not squeezed.
A strong yen also helps other Asian economies to keep a lid on interest rates, boosting their currencies against the dollar. This is a useful effect, as far as it goes. One academic has suggested the BoJ should drive for a 50% fall in the yen against the dollar, which would theoretically ease liquidity. Practicality was clearly not a weighty consideration in this thesis.
What would work nicely is a gradual, sustained yen appreciation, which lets the US down easily while lending support to the Nikkei. But already any sign of good news shoots the yen higher than it should. Japan's first quarter GDP figures were surprisingly good; this week industrial production data for June looked positively perky. Second quarter GDP numbers are expected to shine too.
BoJ officials keep saying the big intervention guns are primed and targeted. If the yen takes just one more step, it will be blasted back to 120/$. However, the bluster is losing its lustre. Currency traders caught the BoJ's warning to Japanese companies to take their own measures to deal with a rising yen. They also heard Eisuke Sakakibara's muttered remark that the yen could go to 110/$ as long as shares prices kept rising. But while the BoJ threatens and walks backwards, the monetary SWAT teams at the Fed and Treasury have drawn their line in the sand at 110/$. Then they'll shoot to kill.
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