O'Neill trip triggers fresh lows for yen


O'Neill feels it's up to the market to set the yen's level, and the market sent it through 134 for the first time since October 1998

TOKYO, Japan -- U.S. Treasury Secretary Paul O'Neill met Japan's Finance Minister, Masajuro Shiokawa, in Tokyo on Tuesday, to discuss the world's two largest economies, both in recession.

The two agreed on major policies, Shiokawa said, adding they did not get in-depth on the yen's recent rapid slide.

"Mr. O'Neill did not speak much about foreign exchange," Shiokawa told a news conference.

"He said it's something that is determined in the market, and he respected the market's judgment."

But that remark prompted traders to sell off the Japanese currency.

The yen set a fresh three-year weak-level against the dollar on Tuesday afternoon, hitting 133.82 in Tokyo trade.

It broke through 134 for the first time since October 1998 in European trade, hitting 134.20. That means it is down more than 1.5 percent in January alone.

Seen as tacit approval of weakness

Currency traders feel the Japanese government has been "talking the yen down," with a series of comments suggesting it appreciates a weaker currency.


Shiokawa insists officials aren't weakening the yen on purpose, but traders infer Japan likes a weak yen

They took Shiokawa's statement as affirmation that the United States does not object to a weaker yen.

O'Neill later sidestepped the exchange-rate question, saying he hopes Japan will tackle its underlying problems.

"I choose not to engage directly on he subject," he said. "Exchange rate modification can do nothing to fix a mountain of nonperforming loans or to improve underlying rates of productivity."

The currency had strengthened slightly since early January, as Japanese officials repeated the line that they have not actively been encouraging the currency's slide.

Shiokawa told O'Neill on Thursday that Japan's government has not been deliberately weakening the yen and does not plan to.

But tacit U.S. approval of its weakening set the currency off again.

Since mid-September, the yen's value has declined 15.5 percent against the American currency.

Bankruptcies up, Daiei casting reform doubt

Its run has prompted sharp criticism from China and South Korea, Japan's two largest trading partners in Asia.

They have seen their currencies pressured, and companies in both nations are finding it hard to compete with Japanese goods, which get cheaper when the yen weakens.

The yen slide has also drawn the ire of executives such as General Motors CEO Rick Wagoner.

At the start of January, he accused Japan of not playing "fair" with its exchange rate. Japan has vast U.S. dollar reserves, he said, and uses them to manipulate the yen.

Japan watchers believe the government wants a weaker currency to encourage exports, with little else to spark the economy.


Malaysian leader Mahathir Mohamad (r), seen with Junichiro Koizumi, warned the ringgit peg could fall if the yen weakens much beyond 140 to the dollar

Japan's government debt is the highest level of any major industrial nation, hampering government spending, and interest rates are already at zero.

But currency experts say the bigger picture behind the yen's slide stems from pervasive, long-term problems with Japan's economy.

Bankruptcies hit 19,441 in 2001, credit agency Teikoku Databank said Monday, the second-worst year since World War II.

Fears that Japan's banks are yet again dragging their feat on tackling a mountain of problem debts were renewed with Friday's bailout of Daiei Inc., Japan's largest supermarket operator.

Critics feel Japan's banks have persistently handed life lines to troubled companies that should be allowed to go under.

Faced with a banking system in "grossly inadequate financial shape," Moody's Investors Service downgraded the credit rating of all of Japan's 10 biggest banks on Monday.

Koizumi repeats pledges

Prime Minister Junichiro Koizumi has promised to push banks to deal with their bad loans, while doing his best to avert a meltdown.

"The government will closely watch over the bad-loan situation," Koizumi told parliament on Tuesday.

He repeated his pledge to hold an emergency meeting if he sees a financial crisis developing.

"The government will act boldly and flexibly," he said.

O'Neill told Shiokawa he expects U.S. growth to hit 3.0 to 3.5 percent by the end of this year, an aide said.

O'Neill was visiting the Japanese capital as part of the donor conference on Afghanistan. He met with Financial Services Agency chief Hakuo Yanagisawa on Monday.