Japan Actively Intervenes to Keep the Yen Down

So much of the speculation was right. The Japanese yen definately isn't accompanying the euro on it's climb upwards - some things in life you just have to do alone - and they have spent this month alone 5.6 million dollars (in yen of course) to back their determination. The curious thing is that they tried to keep quiet about it. My feeling is that it is now only a matter of time before the ECB gets the message and starts to intervene itself, whether by dropping rates or selling euros, before we have the curious spectacle of three of the four major currencies trying to beat themselves down. Sterling could then be the one with the problem, since with house prices rocketing the BofE certainly won't be looking to bring rates down, except that with Blair backing Bush on Iraq, so the petro dollars won't be heading for London any time soon.

Japan's Ministry of Finance intervened in the foreign exchange market this month to weaken the yen, but did not tell investors until monthly data on Friday uncovered the transactions. The Bank of Japan used some Y678bn ($5.6bn) in a series of actions to buy dollars for yen to stem the Japanese currency's appreciation. An official on Friday said the move was designed to stabilise the yen rather than actively weaken it.Despite the weakness of Japan's economy, the dollar's renewed slide has led the yen to strengthen in spite of officials' attempts to talk it lower. The Japanese currency has gained some 6 per cent in the past two months, prompting concerns about the damage a stronger currency will do to exporters' balance sheets and its possible impact on Japan's struggle against deflation.

The dollar stood at Y119.3 against the yen on Friday, up from three-month lows at Y117.5 earlier this month. Analysts said the covert nature of the BoJ's actions was a surprise. The bank, which holds massive reserves, has frequently intervened publicly in the market to limit yen strength and last acted in a series of moves between May and June last year.
Source: Financial Times
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COMMENT

Why Japan Matters

Morgan Stanley's Robert Alan Feldman points out, at a time when many seem to have forgotten that Japan exits, why Japan continues to matter.

Yet another way Japan matters is in helping to integrate China into the world economy. Compared to other countries, Japan trade with China is more complementary. Japan produces many things that China cannot produce for itself yet, and China produces many things in which Japan has no comparative advantage at all. The gains from trade between capital-intensive Japan and labor-intensive China are huge. Of course, the commodity producers will also reap major gains from trade with China. However, compared to many manufacturing-oriented economies, Japan is in a rather good position, even if there are still some industries where Chinese products will replace Japanese ones. In addition, Japan is one of the few countries that benefit from the interaction of demographics and trade. The working-age population in Japan has already begun to decline, and so inexpensive Chinese products are crucial in supporting the Japanese standard of living. The business opportunities from this trade complementarity are legion. True, many in Japan are scared of China. Surprisingly to me, these fears are shared -- and amplified -- in other countries. My colleagues who cover Latin America were particularly anxious about Chinese competition in some of their industries.

Finally, Japan has a prominent place in the debate about how macroeconomic theory should be applied in financial markets. Is deflation solely a monetary phenomenon, or is it also a real phenomenon -- e.g., due to insufficient structural adjustment that has prevented the absorption of redundant workers? Countries around the world, faced with structural rigidities (e.g., Germany) or rising imports from China (everywhere), will face the same problem that Japan has grappled with for a decade. Japan�s experience is precious. Moreover, investors in many markets now face the issue of valuation of equities in a deflationary world. Who has more experience in this than Japan?
Source: Morgan Stanley Global Economic Forum
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The Bad News From Japan Continues

Unemployment up, GDP and consumer prices down, there certainly doesn't seem to be any end in sight for Japan's economic woes. Add to this the fact that industrial production contracted in December for the fourth consecutive month, and that the Nikkei touched 20 year lows this week, and it's easy to see there's little cause for optimism. Nevertheless some still seem able to call bad news good, even if the little glimmer of hope, the changing ratio of applicants looking for work to jobs, may be more a reflection of the fact that older people are leaving the job market than anything else. The good news, that is, is that the unemployment problem can be thought by some to be improving because as the population gets older more peolple are retiring, or staying at home to care for the elderly!!

Unemployment in Japan reached a post-war high in December while the deflation that has racked the economy for three years showed no signs of alleviating. Economists are forecasting the economy to contract in the fourth quarter. December unemployment reached 5.5 per cent. Though the ratio of new job offers to applicants rose to 1.04, its highest level since June 2001, the percentage of employed people in the workforce and those actively seeking work declined to 60.6 per cent. In a comedy of errors, Masajuro Shiokawa, the country's finance minister, initially said the jobless figure was "good news". He then retracted the comment after a ministry official whispered in his ear, presumably that the news wasn't so good. Mr Shiokawa said the rise in employment in certain sectors was a positive development.

The core consumer price index for December fell 0.7 per cent, year-on-year, though it held steady from the previous month. For the year, the CPI fell 0.9 per cent, its biggest year-on-year decline. Falling prices have plagued the economy for three consecutive years, making it harder for businesses to repay loans. "Deflationary pressures are still very strong, and with the cut in winter bonuses, final demand will be subdued for some time," said Ryo Hino, economist at JP Morgan in Tokyo. Peter Morgan, economist at HSBC in Tokyo, said that the Japanese CPI underestimated the actual degree of deflation by about 0.7 percentage points. Economists have long questioned the accuracy of Japanese economic data, which led to a re-vamp in the way gross domestic product is calculated. "The main reasons are that CPI does not include prices for short-term sale items, despite the fact that such sales are becoming increasingly common, and it does not adjust adequately for quality changes," said Mr Morgan.
Source: Financial Times
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Japan - The Chinese Connection

The news that China is now the world's number one exporter to Japan has provoked considerable commentary inside Japan. From calls for a revaluation of the Chinese Yuan to recognition that the economic futures of the two countries are now inextricably linked. In particular proponents of the latter view draw attention to the fact that demand from China allowed Japan to increase its trade surplus in 2002, for the first time in four years. Among the factors that have caused the value of Japanese imports from China to rise for four straight years since 1999 is the trend among Japanese manufacturers to shift production to China to take advantage of cheap labor and resources or, to put this another way, to increasingly rely on Chinese outsourcing. And while Chinese products grab an ever greater share of global markets, as their economy shrinks under the impact of deflation Japanese products are gradually losing theirs. Japan in 2001 supplied the United States with 11 percent of its imports, down 1.4 percentage points from the year before. Over the same period, its share of South Korea's import total fell 0.9 point to 18.9 percent.

Some see a threat, others opportunity. But all agree-China can't be ignored. Already in Japan, made-in-China goods are everywhere, accounting for 18.3 percent in value of all imported goods last year. At one major supermarket chain, a full third of all imports come from China, having replaced the United States as the top source five years ago. A company executive said technical assistance from Japanese trading houses helps ensure the quality of the cheap Chinese products. The phenomenon affects all industries. Machinery accounted for 33.5 percent of total import value from China last year. Computer imports from China grew 81.7 percent in 2002 from the previous year, while semiconductor imports grew 21.5 percent.

Masaki Yabuuchi of the Japan External Trade Organization said Chinese manufacturers have become more competitive ever since a strengthening yen drove Japanese manufacturing to their shores in the latter half of the 1990s. Japanese direct investment in China surged in 1995, when the yen appreciated to 79 against the U.S. dollar, he said. The result was a massive increase in manufacturing capacity. One Japanese firm taking advantage of that capacity is NEC Corp. The company plans by March to import about 1.2 million Chinese-made personal computers, or 70 percent of its consumer PC sales for the fiscal year. By fiscal 2004, the electronics giant intends to raise that figure to 85 percent.
Source: Asahi Shimbun
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The constant inflow of Chinese products whose low prices reflect China's cheap labor and other manufacturing costs may intensify Japan's deflation problem. To cope with rising imports from China, government officials intend to seek a revaluation of the Chinese currency. Japanese calls for such a move may draw international attention. According to a preliminary report on the nation's trade in 2002 released by the Finance Ministry on Monday, imports from China rose 9.9 percent from a year earlier to 7.72 trillion yen, surpassing those from the United States at 7.22 trillion yen. Such sharp rises in imports of cheap Chinese products have provoked some observers to voice strong concerns, saying inflows of cheap Chinese goods may exacerbate deflation. Although China has enjoyed high growth rates, its inflation rate has remained almost zero. In addition, the value of the Chinese yuan is "too low compared with the currency's actual capacity," said a senior Finance Ministry official. If China's exports continue to rise, this would be tantamount to China exporting deflation to other countries, the official added. At a meeting of finance ministers and central bank governors of the Group of Seven leading industrialized nations, to be held in Paris next month, the ministry intends to place the value of the yuan at the top of the agenda, as calls mount for a concerted effort to see off the growing threat of deflation in the world economy.
Source: Daily Yomiuri
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