Outlook: Another false dawn for the yen?
Friday 19 June 1998
FAR EASTERN markets jumped for joy yesterday following the deliberately announced news from the US that the Federal Reserve has finally begun intervening to support the yen. Trouble is that unless the Japanese government takes urgent and far-reaching steps to reform its bombed-out economy, it won't make a blind bit of difference long-term. The world's central banks could spend their combined reserves 10 times over, and still it couldn't stop the markets in full flood. In the absence of a dramatic policy response from Japan, the arrival of the US cavalry isn't going to change things for more than a few weeks.
So is Japan finally going to get off its backside and do something? The Fed's intervention may be a signal that it is. Certainly it seemed timed deliberately to coincide with this weekend's meeting in Tokyo of G7 deputy finance ministers.
The choice of personnel for the hurriedly arranged meeting, as much as the fact that the US has intervened in the currency markets for the first time since 1995, demonstrates just how seriously the leading countries are taking Japan's problems. Britain is sending Nigel Wickes, a high-ranking Treasury mandarin and veteran of countless emergency G7 pow-wows. Plainly the participants mean business. This time there are no photo opportunities for politicians.
That was the good news about Japan yesterday. The bad news is that there is still a lot of negotiation to do. Despite the success of the surprise US intervention on Wednesday in boosting the sagging Japanese currency, and in turn the stock market, traders remained sceptical about whether the yen can really be turned around without a clear and dramatic change in policies by the Japanese government.
Whatever the Japanese for "fine words butter no parsnips", Prime Minister Ryutaro Hashimoto needs to hear it. For the record, he repeats the usual mantra about boosting the economy, promoting deregulation and speeding banking reform. But he also indicated yesterday that there had been no deal with the US to put in place more substantial policies. He repeated his view that restructuring of the banks did not need fresh public funds. On the question of permanent tax cuts and tax reform, he agreed there was a need for "in-depth discussion".
While these "in-depth discussions" continue Japan's economy is vanishing down the plughole. Currency market intervention is never a solution in itself. It took six months for the G7 to turn around the dollar when it appeared to be in free-fall in 1995 but it only worked because the markets began to believe the relative positions of the two economies were reversing. Japan will struggle to demonstrate a similar turnaround
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