Dollar losses masking Japan's instability


The yen's apparent strength against the U.S. dollar masks Japan's instability, analysts say

By Alex Frew McMillan
CNN Hong Kong

TOKYO, Japan (CNN) -- As Japanese stocks plumb new depths, the yen has remained surprisingly stable.

Having gained a little ground against the U.S. dollar on Tuesday, it is only slightly weaker on Wednesday.

The Japanese currency stands at 117.32 to the dollar near 1 p.m. Tokyo time, having ended New York trade at 117.20.

But experts say that masks Japan's level of instability. The current stock selloff threatens to throw Japan into financial crisis, a situation it narrowly avoided in March.

Japan's economic recovery will be shortlived, economists are predicting, implying a weaker currency. David Satterwhite, managing director of the Economist Corporate Network in Japan, expects the country to sink back into recession this year. (Full story)

'Disaster of unparalleled proportions'

The Tokyo stock market is setting fresh 19-years lows on Wednesday, with the Topix down 2.21 percent at 884.22 as the afternoon session sets off in Japan.

The Nikkei is off 1.88 percent and has lost 10.2 percent since Aug. 26. (Full midday roundup)


Having broached 120 last month, the yen is set to strengthen perhaps to 110, Satterwhite said, threatening exports

Banks are again taking a pounding, locked in a cycle with the overall selling thanks to their large stock portfolios. Sumitomo Mitsui is leading Wednesday's losses with a 8.27 percent slump to 510 yen and all the Big Four are down more than 5 percent.

That is the main concern in Japan, where the banks face a looming fiscal half-year deadline at the end of this month to recognize stock losses in their portfolios.

If the Nikkei falls through 8,100, Japan's banks would see their capital levels fall below the 8 percent international standard, according to the Bank of America. That would force them to withdraw from international banking. It would also mean a banking collapse.

"It could be a disaster of unparalleled proportions if it goes on indefinitely," Marshall Gittler, the bank's Japan economist, told CNN.

Dollar giving more than the yen

All those factors point to a weaker currency. So what gives? The answer is the dollar.

The greenback is even shakier than the yen at the moment, thanks to uncertain outlook for the U.S. economy, the prospect of an invasion of Iraq and the higher oil prices that would bring with it.

"Japan is a leveraged play on the U.S.," Gittler said. "Japan's growth depends very strongly on exports to the U.S. So if growth in the U.S falls, Japan's exports fall and Japan falls back into recession."

On the currency front, the dollar's weakness has masked the yen's own weakness. But a glance at the euro shows both are treading a downward path.

The euro is close to parity with the dollar, trading at 99.57 in Asian trade out of Singapore, and pundits expect it to clear parity easily in the short term.

The euro is stronger against the yen, as well, starting Wednesday at 116.65 and rising to 116.84.

Government may step in

Zembei Mizoguchi, head of the Ministry of Finance's international bureau, said on Wednesday that he is following the foreign-exchange market closely.

"The market moves on different factors and it is true that there are some uncertainties," Mizoguchi said.

But he said the ministry's view hasn't changed over the stock selloff of the past days, despite weak U.S. manufacturing numbers.

"There is no change in the strength of the U.S. economy in the medium term," he said.

Satterwhite sees the yen strengthening to 115 or even 110 over the next six months, which would almost certainly prompt Japan to intervene by buying dollars, weakening the yen to protect exports.

Gittler said he expects the government to step into the stock market, too, through government pension fund buying. But there may be little Japan can do.

"They pulled every rabbit out of their hat last March," Gittler said. "I don't think there are any rabbits left."