The dollar soared Wednesday against the Japanese yen after Japan’s Finance Ministry announced a surprise set of measures to encourage Japanese investment overseas.
The Tokyo announcement was followed by large dollar purchases by the Bank of Japan and then by the U.S. Federal Reserve when trading opened in New York.
The result: By the end of the day, the dollar had jumped to 90.95 yen in New York, up 3.3% from 88.05 on Tuesday, and hit its highest level since March 14.
Early today in Tokyo, the dollar was trading above the 91-yen level before falling back to 90.85.
Although the dollar’s rebound is considered good news on its face, the Japanese measures that accelerated it were seen as having the potential to fuel an economic recovery there, prompting growth that could spill over to the United States.
A key feature of the dollar-boosting package is deregulation that makes it easier for Japanese insurance companies to make dollar-denominated investments.
Insurance companies previously were banned from making loans in foreign currencies. Effective immediately with Wednesday’s announcement, they are totally free to do so, said Eisuke Sakakibara, head of the ministry’s International Finance Bureau, speaking at a news conference.
Other measures in the package allow new accounting procedures that for some Japanese companies should increase the relative attractiveness of U.S. Treasury securities compared to Japanese government bonds.
The new policy also declares that purchases of foreign bonds by the government-controlled postal savings system and national pension systems will be stepped up.
Although it is unclear how many Japanese insurance companies and other firms may decide to raise their level of foreign investment, the Japanese government has tremendous direct leverage over domestic and foreign financial markets partly because it controls investment of the massive deposits in the postal savings system, which totaled about $2.3 trillion as of the end of July.
Analysts in Tokyo said the measures were motivated by a desire to drive up the dollar and reassure the U.S. government that Japan would not yank large sums of capital out of U.S. markets to deal with intensifying financial problems at home. The steps may also be aimed at boosting profits of Japanese banks and insurance companies as they seek to cope with massive bad loans left over from the plunge in Japanese land and stock values since 1989.
If the dollar continues to rise, Japanese investors’ U.S. securities will automatically gain in value, possibly producing a windfall.
Japan’s interlinked and heavily regulated private financial system is burdened with problem loans officially acknowledged to total at least $556 billion. A run this week on a troubled Tokyo credit union--with depositors withdrawing $1 billion in three days despite government pledges that their money was safe--has further spotlighted the banking system’s troubles.
In Washington, Treasury Secretary Robert E. Rubin approved of the Japanese measures. He said the currency intervention is consistent with the directions settled upon by finance ministers of the seven leading industrial nations when they met in Washington in April. They declared the dollar’s slide unjustified.
Traders estimated there were at least four central-bank-led purchases of dollars--with a value ranging from $1 billion to $3 billion--between 9 a.m. and 10:05 a.m. EDT Wednesday.
Even before the intervention, the dollar’s fortunes had been turning. It has been rising steadily since falling to a post-World War II low of roughly 80 yen in the spring.
The dollar’s weakness has been a boon for many U.S. companies because it lowers the prices of U.S. exports abroad and raises prices on imports to the United States. But those side effects have been crippling for many Japanese companies, helping to keep Japan mired in recession even though its trade surplus with the United States remains gigantic.
Many economists have argued that the yen has become absurdly strong and that a weaker yen--and stronger dollar--would help the world economy by keeping Japan out of depression.
Although U.S. companies may lose some of their advantages if the dollar strengthens, many experts say the risk of financial disaster in Japan is the greater worry.
With a growth rate expected to be no greater than 1% this year, Japan has been seen as a drag on the global economy. The measures announced Wednesday, said economist Gary Hufbauer of the Institute for International Economics, could end up boosting economic growth in Japan next year to the range of 2% to 3%.
The Japanese stock market reacted favorably to the government’s steps. The Nikkei-225 stock index rose 362.18 points, or 2.2%, to 16,720.75 on Wednesday, and it was up 222.80 points at 16,943.55 in midmorning trading today.
At the same time, yields on Japanese government bonds rose sharply, suggesting that some investors may be selling those securities in favor of foreign bonds. The yield on the 10-year Japanese government bond jumped to 3.09% early today from 2.98% at Wednesday’s close.
Japanese investors’ purchases of foreign stocks and bonds have plunged in recent years. Foreign bonds worth $947 billion were acquired last year, compared to $1.7 trillion in 1989, according to Finance Ministry figures. The value of foreign stock purchases plunged to $53 billion in 1994 from $107 billion in 1989.
Reversing this trend could have a dramatic effect in strengthening the dollar against the yen, government officials say.
The measures announced Wednesday include “some substantive-sounding changes,” said Ronald Bevacqua, economist at Merrill Lynch Japan. But “it doesn’t seem to me this was motivated by the yen-dollar rate. If it were, we would have seen it a lot sooner,” he said.
Instead, “it may be a reaction to U.S. concerns over the ability to keep access to Japanese capital,” he said. “I think what [U.S. officials] are concerned about more than anything else is that if there were a major crisis in Japan, capital outflows would drop off significantly.”
Despite the Finance Ministry’s view that increased capital outflows could weaken the yen, many analysts believe that in the long run, the only thing that can stop the inexorable strengthening of the yen is for Japan to significantly reduce its huge trade surpluses.
Gerstenzang reported from Washington and Holley from Tokyo.