JAPAN’S RATE CUT : Incremental Change : FINANCIAL MARKETS : Dollar and Dow Both Rise as U.S. Approves of Move
Japan’s latest interest-rate cut sent the dollar up sharply against the yen on Friday and helped spark rallies in U.S. and Japanese stocks.
What’s more, U.S. Treasury Secretary Robert E. Rubin hinted at more coordinated efforts to further boost the rebounding U.S. currency.
The Bank of Japan’s cut in its key discount rate, from 1% to 0.5%, was announced in Tokyo at midday Friday and powered the Nikkei-225 stock index up 658.37 points, or 3.7%, to 18,279.55--the highest close since Feb. 13.
The dollar surged to 100.21 yen in Tokyo, its best level since January 23, before falling back. In New York the dollar closed at 99.70 yen, up from 98.98 on Thursday.
On Wall Street, the Dow Jones industrial average gained 31 points to 4,700.72 in a broad-based rally that seemed to focus on the positive aspects of falling global interest rates rather than on the potential negative effects of the stronger dollar.
Although the dollar’s resurgence could attract more foreign investors to U.S. securities, it also could reduce American companies’ competitiveness--especially with Japanese exporters--by raising prices of U.S. goods abroad.
That aspect of the dollar’s strength had depressed some U.S. multinational stocks in July and August. But on Friday investors appeared more impressed with the idea that recent interest rate cuts in Japan and Germany--and the potential for fresh U.S. rate cuts--could prolong the global economic expansion.
“This gives [Fed Chairman] Alan Greenspan and his colleagues a good amount of room to cut U.S. interest rates further,” said Gary Hufbauer, economist at the Institute for International Economics.
Rising stocks outnumbered losers by 14 to 8 on the NYSE on Friday, and most major stock indexes rose to record highs, capping another bullish week. The Standard & Poor’s 500 index gained 2.39 points to 572.68 on Friday, and the Nasdaq composite surged 8.95 points to 1,060.03.
The rally was led by industrial and technology issues that would have the most to gain from an extended economic expansion.
Boeing gained 1 7/8 to 68 1/2, Motorola added 1 1/4 to 79 5/8, Dupont jumped 1 1/4 to 68 1/4, 3M Co. shot up 1 5/8 to 55 1/2 and Union Carbide surged 2 5/8 to 40 1/4.
In the bond market yields ended slightly lower, with the 30-year Treasury bond yield dipping to 6.58% from 6.60% Thursday.
With Japanese interest rates at record lows, the Japanese government is in part hoping that the nation’s big investors will “export” more capital into higher-yielding foreign securities. That could further depress the yen’s value, in turn making Japanese exports cheaper abroad and thereby rejuvenating Japan’s beleaguered economy.
In the wake of Friday’s rate cut, the Bank of Japan also aggressively bought dollars, stoking the rally.
However, the dollar failed to rise against other key currencies. It dipped to 1.4785 German marks from 1.4787.
The Clinton Administration has supported the idea of a stronger dollar to help Japan recover. And on Friday, Rubin said, “ . . . We remain prepared to cooperate closely in exchange markets”--suggesting coordinated dollar-buying ahead by the Federal Reserve and other world central banks.
Although some U.S. firms are worried about the resurgent dollar, economists say it is in no one’s interest to have Japan spiral into depression, and they note that if lower interest rates and a weaker yen help restore growth in Japan, the benefits could be felt worldwide.
