The Japanese authorities cut interest rates by an expected 0.75 percentage points to an historic low of 1 per cent on Good Friday. But this and a series of other measures did not convince the markets that Japan was serious about cutting its massive trade surplus, which is underpinning the value of the yen. The currency received a further unprecedented boost from official statements that Japan now wants the yen to take a larger role as a main international reserve and trading currency.
Takafumi Kaneko, a deputy director of the government-run Economic Planning Agency, said the United States no longer seemed able to maintain the dollar as a stable world currency.
"The economic power of the US is on the decline and that of Japan, in relative terms, is increasing," he said. The Japanese government planned measures to stimulate international use of the yen, he added.
Market operators said the dollar could now quickly plunge below Y75 against the yen. It has already lost more than 15 per cent of its value against the Japanese currency this year. Although it moved up from around Y80 to Y83.75 in Far Eastern markets on Friday, few dealers believe this marks the end of the dollar's weakness.
"The EPA statement is very bullish for the yen," said Neil McKinnon, economist at Citicorp. "Estimates of Y75 to the dollar by the year end now look very tame indeed. We could see a very sizeable move to around Y60 by the summer."
Some analysts see the dollar falling even lower. Robin Aspinall, economist at Panmure Gordon, believes it could plunge to around Y54 later in the year.
By promoting the yen as a significant reserve currency for the first time, Japan is likely to stimulate heavy buying, particularly among Asian central banks. These hold large reserves of dollars, which are falling in value, while their overseas debt is predominantly in yen.
At the same time, the interest rate cut would almost certainly fail to quell buying of the Japanese currency, observers said. With interest rates so low, countries and businesses would be encouraged to borrow more in yen, with the added incentive that the currency may rise in value over the next few months.
Dealers added that the economic package failed to make any substantial changes, such as faster deregulation of Japanese markets, which might have altered the market's bullish view of the yen.
The US authorities, meanwhile, appear unconcerned at the dollar's weakness, which is boosting exports. This is putting pressure on Japan in the middle of increasingly bitter trade negotiations between the two countries. Analysts were surprised at the timing of Japan's statement about the yen as a reserve currency, since it will only push up the currency's value further. Some think it may be a tactical manoeuvre in the talks.
The exchange rate problems and the EPA statement are likely to set the agenda for today's meeting of the 18-member Asia-Pacific Economic Co-operation grouping in Bali. Robert Rubin, US Treasury Secretary, and Maseyoshi Takemura, Japan's Economics Minister, will both be there. Mr Takemura said he wanted a "serious debate on currency problems with finance ministers of other nations, including the United States."Reuse content