Can any $ minsters beat such wisdom?
Published November 7, 2008
Yen could appreciate beyond 90 to the US$: Mr Yen This could aggravate Japan's stock market woes, and recession
By VIKRAM KHANNA
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(SINGAPORE) The Japanese yen could strengthen to as much as 80 to the US dollar and 100 to the Euro by next year, aggravating Japan's stock market woes, as well as its recession, according to prominent Japanese economist, Eisuke Sakakibara.
Soothsayer: Mr Sakakibara, known as 'Mr Yen' for his judgments on currency markets, said he would not be surprised to see the Nikkei retreat to 7,000 Mr Sakakibara, who was known as 'Mr Yen' for his influential pronouncements on currency markets when he served as Japan's vice-minister of finance for international affairs during 1997-99, said he would not be surprised to see Japan's key stock market index, the Nikkei, retreat to 7,000 under the weight of a strong yen, a domestic recession and the heavy exposure of Japanese exporters to a weak global economy.
He said the yen would strengthen because the unwinding of the yen carry-trade 'is not over yet'. The carry-trade was a common phenomenon in recent years, in which investors borrowed yen at near-zero interest rates and switched to assets in higher yielding currencies. During the last month, some of the carry-trade has been unwound, causing the yen to soar against other currencies.
Mr Sakakibara, who is currently Professor of Economics at Waseda University in Japan, said any significant decline of the Nikkei index - which a stronger yen would trigger - would be problematic for Japan's banks, many of which have large holdings of stocks; about 20 out of Japan's 125 national banks might then require infusions of capital, he said.
If the yen were to strengthen beyond the level of 90 against the US dollar, the Bank of Japan could be tempted to intervene in the markets, according to Mr Sakakibara. But he added that it could not do this without at least the tacit approval of the US or Euro-area authorities. But this would be difficult, because the US government is in transition and the Europeans, also faced with recession, are unlikely to want to intervene to strengthen the Euro.
Asian economies would also be hit, Mr Sakakibara said. However, they would be more resilient than during the Asian crisis of a decade ago, because of their strong foreign exchange reserve positions and relatively sound financial institutions. He reiterated his call for an Asian Monetary Fund, which he first made during the Asian crisis. He suggested that if Asian countries pooled together 5 per cent of their total reserves of US$4 trillion, this would create a US$200 billion fund that any country facing temporary problems could draw upon.
Mr Sakakibara, who was speaking at a luncheon organised by the investment firm Uni-Asia Corp, was pessimistic about the prospects for the US and global economy. 'We are still in the midst of a crisis that comes once or twice in a century,' he said. And although the worst of the panic has passed, the financial deleveraging - the selling of assets by highly leveraged institutions
- is still going on. He added that the downturn would probably continue till mid-2010, when the US housing market would bottom out. A key indicator to watch for the timing of the upturn was the Case-Schiller index of US housing prices, he said.
Mr Sakakibara suggested that policymakers still have a lot of work to do. A key danger lay in the CDS (credit default swap) market. Such swaps were intended to provide protection to investors against financial instrument defaults, but then they themselves became objects of speculation. He pointed out that outstanding CDSs now totalled US$54 trillion, about the same as global GDP. He called for the urgent creation of a centralised settlement system for CDSs, which he described as 'time-bombs'.
Mr Sakakibara said that with monetary easing coming close to being exhausted, fiscal policies would have to come to the fore. The next US Treasury Secretary will probably engage in heavy public investment, he said, which would help ease the pain of the crisis.
However, there would also be 'a paradigm shift' in policy, with more regulation and tighter supervision, and with the financial sector serving the real economy rather than the other way around. 'This is the end of market fundamentalism, the end of the Greenspan age,' he said.
Published November 7, 2008
Yen could appreciate beyond 90 to the US$: Mr Yen This could aggravate Japan's stock market woes, and recession
By VIKRAM KHANNA
Email this article
Print article
Feedback
(SINGAPORE) The Japanese yen could strengthen to as much as 80 to the US dollar and 100 to the Euro by next year, aggravating Japan's stock market woes, as well as its recession, according to prominent Japanese economist, Eisuke Sakakibara.
Soothsayer: Mr Sakakibara, known as 'Mr Yen' for his judgments on currency markets, said he would not be surprised to see the Nikkei retreat to 7,000 Mr Sakakibara, who was known as 'Mr Yen' for his influential pronouncements on currency markets when he served as Japan's vice-minister of finance for international affairs during 1997-99, said he would not be surprised to see Japan's key stock market index, the Nikkei, retreat to 7,000 under the weight of a strong yen, a domestic recession and the heavy exposure of Japanese exporters to a weak global economy.
He said the yen would strengthen because the unwinding of the yen carry-trade 'is not over yet'. The carry-trade was a common phenomenon in recent years, in which investors borrowed yen at near-zero interest rates and switched to assets in higher yielding currencies. During the last month, some of the carry-trade has been unwound, causing the yen to soar against other currencies.
Mr Sakakibara, who is currently Professor of Economics at Waseda University in Japan, said any significant decline of the Nikkei index - which a stronger yen would trigger - would be problematic for Japan's banks, many of which have large holdings of stocks; about 20 out of Japan's 125 national banks might then require infusions of capital, he said.
If the yen were to strengthen beyond the level of 90 against the US dollar, the Bank of Japan could be tempted to intervene in the markets, according to Mr Sakakibara. But he added that it could not do this without at least the tacit approval of the US or Euro-area authorities. But this would be difficult, because the US government is in transition and the Europeans, also faced with recession, are unlikely to want to intervene to strengthen the Euro.
Asian economies would also be hit, Mr Sakakibara said. However, they would be more resilient than during the Asian crisis of a decade ago, because of their strong foreign exchange reserve positions and relatively sound financial institutions. He reiterated his call for an Asian Monetary Fund, which he first made during the Asian crisis. He suggested that if Asian countries pooled together 5 per cent of their total reserves of US$4 trillion, this would create a US$200 billion fund that any country facing temporary problems could draw upon.
Mr Sakakibara, who was speaking at a luncheon organised by the investment firm Uni-Asia Corp, was pessimistic about the prospects for the US and global economy. 'We are still in the midst of a crisis that comes once or twice in a century,' he said. And although the worst of the panic has passed, the financial deleveraging - the selling of assets by highly leveraged institutions
- is still going on. He added that the downturn would probably continue till mid-2010, when the US housing market would bottom out. A key indicator to watch for the timing of the upturn was the Case-Schiller index of US housing prices, he said.
Mr Sakakibara suggested that policymakers still have a lot of work to do. A key danger lay in the CDS (credit default swap) market. Such swaps were intended to provide protection to investors against financial instrument defaults, but then they themselves became objects of speculation. He pointed out that outstanding CDSs now totalled US$54 trillion, about the same as global GDP. He called for the urgent creation of a centralised settlement system for CDSs, which he described as 'time-bombs'.
Mr Sakakibara said that with monetary easing coming close to being exhausted, fiscal policies would have to come to the fore. The next US Treasury Secretary will probably engage in heavy public investment, he said, which would help ease the pain of the crisis.
However, there would also be 'a paradigm shift' in policy, with more regulation and tighter supervision, and with the financial sector serving the real economy rather than the other way around. 'This is the end of market fundamentalism, the end of the Greenspan age,' he said.
