Strength of yen burdens Japan

STRUGGLING to rebuild after the Kobe earthquake, beset by political problems and anxious to put new life in its export industries, Japan could not be facing the problems of the US dollar at a worse time.

Japanese officials rushed from meeting to meeting last week, trying to respond to the dollar's weakness and their own currency's strength. The central bank went out on a US dollar-buying spree, yet on Wednesday the dollar hit a record low of 88.765 against the yen and foreign exchange traders remain convinced that the US currency still has further to fall.

The problems of a high yen are difficult enough for Japan's home-based export industries, but they are also a painful headache for Japanese companies that have moved assembly work for export-orientated businesses to countries in East Asia, most of whom in turn have currencies linked directly or indirectly to the US dollar.

In Malaysia, where Mitsubishi and Daihatsu are partners in the country's two national car projects, there are concerns about the increasing price of components from Japan undermining the economic feasibility of the ventures.

Concerns over the fate of the US dollar look likely to continue taking a heavy toll in stock markets across Asia. Investors dislike the uncertainty hovering over the dollar's value and so are staying out of the markets.

Nevertheless Asian stockmarkets - with the notable exception of Taipei in Taiwan - attempted a half-hearted rally towards the end of last week, taking the view that the worst of the US dollar shocks were behind them. Japan's Nikkei Average share index then fell to its lowest point since last November.

Optimists are thin on the ground for when trading reopens in Asia at midnight tonight London time. The view from Japan is that the dollar could fall to 80 yen before the end of the year, compared with the present 91.27. In Hong Kong foreign exchange traders are saying that the dollar has probably levelled off for the short term.

Yet again, the fall of the dollar has rekindled the long-simmering debate about breaking the fixed link between the US and Hong Kong currency which is fuelling inflation in the colony and causing interest rates to remain unusually high. The colony's government, however, sees the link as an essential element of currency stability.

That, however, assumes that the dollar itself is a source of stability as a world reserve currency. It is precisely this assumption which is coming under challenge. The Mexican peso crisis has helped to destabilise the dollar, casting a shadow over all dollar-related emerging markets. That is in turn inhibiting a return of confidence in a region which is bursting with underlying economic growth.

The pressure of rising American interest rates is being transmitted across Asia, particularly among some of the faster-growing economies, such as those in Indonesia, Thailand and the Philippines, where prime lending rates are 21, 12.25 and 16 per cent respectively. Interest rates of this order are starting to be a constraint on economic growth and to depress demand for shares - the reverse of what they require.

In Hong Kong on Friday, as Barings' staff were settling down to life under their new Dutch owners, one of the company's executives could not help observing that it was just as well that the Nikkei Index futures positions taken by the rogue trader Nick Leeson had been closed out, because the events of last week would have made an impressive addition to Barings estimated US$1.5bn (£950m) losses.