Analysis: Talking down the yen

MARTIN SIEFF, UPI Senior News Analyst

WASHINGTON, May 28 (UPI) -- From the U.S. perspective, there were two unsettling signs Wednesday that Prime Minister Junichiro Koizumi does not have a strong grip on "old guard" financial strategists in Tokyo.

These old-timers still hold decisive power in government and major private financial institutions. They want to keep the yen weak and still dream of exporting their way out of Japan's decade-long recession without making the painful domestic economic reforms Koizumi recognizes are necessary. Signs are growing that they are getting their way.


First, on Wednesday, Japan's Economy Minister Heizo Takenaka denied a report the same day in The New York Times that he was going to resign and take an Ivy League educational position instead, and that he would stick to his efforts to try and force Japan's spend-thrift and debt-laden major banks to sober up and mend their ways.

"That's nonsense," Takenaka said in nationally televised comments reflecting his usual straight-from-the-shoulder and no-nonsense style.

The good news is that United States, European and other global finance ministers and analysts had cause to breathe a sigh of relief that Takenaka looked like staying after all. For no one doubts that he is the strongest force in the current Koizumi administration seeking to get the big Tokyo banks to show more responsibility and transparency.


However, the bad news is that even though Takenaka does not want to go, a lot of powerful people in Tokyo clearly want him to, and the power of the rumors in the first place reflected that.

They had circulated so widely there was widespread speculation that they had been deliberately spread by the economy minister's many political enemies who have long wanted to force him out.

For Takenaka, despite enjoying the backing of Koizumi, has made many enemies in the banks, government financial institutions -- and among the still potent old-guard of Japan's venerable ruling Liberal Democratic Party. The floating of resignation rumors in the first place suggested that he is being subjected to the kind of political death by a thousand cuts that has put many reformers less bold than he on the skids in decades past.

As long as Takenaka holds his job, financial leaders inside and outside Japan can hope that the pilot light for sweeping economic reform is still burning in Tokyo. Takenaka has been Koizumi's point man in trying to get the once mighty but now long-beleaguered banks to mend their ways and he has had some success.

As Dow Jones Business News reported, "Banks have been forced to speed up their bad loan disposal plans. His tough stance also prompted major banks to raise money from investors to cushion their balance sheets as they write off loans."


If Takenaka goes, many senior officials in the big banks will breathe a vast sigh of relief. But any remaining hope that Koizumi can push through effective domestic economic and financial reform after two disappointing years in office will depart with him.

Also, Takenaka's denial of any intention to resign was overshadowed Wednesday by comments from another top-level Japanese financial official.

For in the second ominous development, Hiroshi Watanabe, the director-general of the International Bureau at Japan's Finance Ministry, signaled that he supported letting the long-mighty yen fall in value on international markets.

Looking at the state of Japan's economy now, "a strong yen isn't reflective of fundamentals," Watanabe said, in comments also carried by Dow Jones Business News.

That is the last thing U.S. Treasury Secretary John Snow wants to hear. For he has been trying to talk the dollar down -- and therefore by implication the yen up -- in recent weeks. The Bush administration wants a weak dollar to boost U.S. export industries so that they will expand, soak up the worrying rise in unemployment, boost domestic consumer confidence and close somewhat America's enormous trade gap, especially with Japan. Therefore a weakening yen encouraged by Tokyo is the last thing Snow wants to see.


But Watanabe's comments were no isolated flash in the pan. As DJBN further noted, "The finance ministry and the Bank of Japan are widely believed to have been recently intervening repeatedly in currency markets by selling yen for dollars and for euros, to keep the yen from rising too far."

Watanabe's comments appeared to reflect the long-since discredited Conventional Wisdom that finance and banking leaders in Tokyo still widely share that they can indeed export their way out of their domestic troubles, just as they did for so many decades in the Good Old Days, without undertaking bold deregulating measures that upset their country's old established interests.

Watanabe was clearly speaking for these interests. In going up against them, Koizumi and Takenaka still face a great deal of entrenched resistance based on the accumulated experience and conventional wisdom of Japanese economic history from the end of World War II to the start of the 1990s. Watanabe's comments, coupled with recent trends in Japanese fiscal policy, suggest that the old-timers are winning.

That is not good news for Koizumi or the Japanese people. It isn't good news for President Bush and Snow either.

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