Currency slips after warning by 'Mr Yen'

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The Independent Online
A FALL in the Japanese yen beyond 133 to the US dollar would be "excessive", Eisuke Sakakibara, the country's Vice Finance Minister - known as Mr Yen - said yesterday. The Yen promptly slid, closing at around 134 to the dollar and most analysts think it has further to fall.

So much then for the currency once seen as a viable alternative point of reference for Asian currencies, in place of the mighty US dollar. Hovering close to a rate of 135 to the dollar, the yen is reaching a crisis point where massive government intervention will be required to prevent a freefall.

The arrival of Japan's "Big Bang" financial reforms on Wednesday, now dubbed the "Big Whimper", has put in place mechanisms to free trade in foreign exchange and facilitate more active trading of the yen.

Now that it is easier to buy and sell, investors need to be given good reasons to it. They certainly did not come on the day forex trading was liberalised. Japan's 19 biggest banks collectively wrote off a record $76bn (pounds 340m) in problem loans, probably the biggest write-off in history.

The poor condition of the banking sector is mirrored by the depressing outlook for the industrial sector as reflected in the gloomy "Tankan" report from the Bank of Japan which suggested that the economic downturn was getting deeper.

The unthinkable prospect of major corporate failures is now a reality. On Tuesday Yamaichi Securities, Japan's largest stock broker, closed its doors; others too have fallen.

Critics of Japan's economic policies say repeated economic stimulus packages are doing nothing for domestic demand. Last week the government announced a spending package worth pounds 73m. Even this was greeted with little more than a derisive sniff by investors.

Economists in Tokyo argue the only alternative is for the government to cut taxes. The government is opposed to this because it is preoccupied by the growing budget deficit which now stands at 105 trillion. Not only does the government believe tax cuts would put an end to hopes of reducing the deficit but the Hashimoto administration would suffer such a loss of face if it bowed to pressure, it would have to resign.

This leaves Japan with no obvious way out of the recession except for an even greater export drive. The problem is that Asian markets are in no fit shape to take more Japanese goods. The US is taking more but a rapid escalation of Japanese exports could fuel protectionist pressure, which in turn could damage the long term interests of Japanese business.

Caught between a rock and a hard place the government is arming itself with a range of sticking plasters, where, arguably, surgery is required. It is not even clear whether the administration is prepared to intervene in the markets to stop the freefall of the yen.

Meanwhile the government has come up with no plausible reasons to persuade investors to buy yen. It looks as though its further fall will in turn drag down other Asian currencies. This is a far cry from earlier hopes that somehow Japan would rescue fellow Asian economies and free them from the tyranny of the ever strengthening dollar.