Asia Times: Japan and Europe: Allies on financial reforms, rivals in currencies



	January 14, 1999	atimes.com

Japan Economy

Japan and Europe: Allies on financial reforms, rivals in currencies
By Suvendrini Kakuchi

TOKYO - Tired of constant criticism from the UnitedStates, Japan is cozying up to Europe in a bid to create a biggerrole for itself in efforts to redefine the world's financialsystem.

But while Japan thinks along the same lines as European leaderson the need for financial reforms - and for lesser reliance onthe U.S. dollar as an international currency - the emergence ofthe euro might well clash with Tokyo's recent calls for the''internationalisation'' of the yen.

Analysts say this month's launch of the euro has actuallycreated a new challenge for Japan, already battling odds to keepup the international profile of its currency.

The yen has suffered setbacks against a backdrop of a longeconomic slowdown and given some $700 billion in bad loanssaddling Japanese banks, which affects confidence in the economy.

Now, the government fears that the euro will take away more ofthe yen's flagging glory. Analysts point out that the euro has nowbegun to be used by 11 European member nations with a grossdomestic product of about $6.5 trillion - a figure thatranks with the U.S.

''The yen will lose part of its share of internationaltransactions to the euro. This would in turn dim the chances ofthe yen becoming a key currency - after the dollar and the euro -and the yen's role would decline,'' warned the Yomuiri Shinbun,Japan's largest daily, in a recent editorial.

The U.S. dollar has 42 percent of the foreign exchange turnovercompared to 12 percent for the Japanese yen. The German mark,which leads the euro, holds 18 percent.

Yet both Japan and European countries agree that the time isripe for a financial system that is not overly dependent on theU.S. dollar, a situation that makes economies susceptible toharmful fluctuations.

In a joint statement Thursday, Japanese Prime Minister KeizoObuchi and French President Jacques Chirac called for a new systemof cooperation in the foreign exchange market given the euro'sdebut.

On the eve of his departure, Obuchi told reporters he will worktoward the establishment of a tripolar international monetarysystem, led by the U.S. dollar, the euro and the Japanese yen.

Ken Landon, a currency expert at Deutsche Securities, saysObuchi has earned support for this proposal because ofsimilarities in mindset with the Europeans.

Both Japan and Europe want stable exchange rates and Europeansare against too much strengthening of the euro, which Landon saysdiffers with the United States that pushes exchange rates onto themarket.

In December, Japanese Finance Minister Kiichi Miyazawa calledfor reforms that include an exchange-rate regime that would bring''greater stability on the one hand and needed flexibility on theother, among the yen, the U.S. dollar and the euro''. Earlier,German finance minister Oskar Lafontaine called for a managedexchange-rate regime.

The world economy is watching how the euro fares, after a weekof trading. As for the yen, analysts say Japan has to try a lotharder to emerge as a winner.

''The yen is the most volatile international currency comparedto the dollar and German mark,'' Landon pointed out. ''This isbecause of government policies that do not indicate stability. Theyen will remain a respected currency only if the government canprove it is ready to deregulate faster and move its economyagain."

The Japanese government is resorting to short-term moves toprop up the yen.

For instance the recent climb of the yen against the U.S.dollar - reaching 110 yen to the dollar from 121 yen - followscomments by vice minister for international affairs EisukeSakakibara, known as ''Mr Yen'', who said the dollar's weaknessstems from the ''bubble-like'' U.S. economy.

''In short,'' comments economist Hiromasa Kubo at KobeUniversity, ''by making the yen stronger, the government hopes itsappeal will last longer. But that's not a very good move because astrong yen will hurt Japan's export industry which has been theonly thing propping up the Japanese economy."

A strong euro could also hurt Japan's position as the leadingeconomic player in Asia, experts say.

Despite being the largest investor and aid donor to the region,Japan has conducted much of its business with Asia in U.S. dollarssince Asian currencies are pegged to the greenback.

But if countries like China - which Japan views as a rival -makes more use of the euro, some Japanese officials fear that thiswould not augur well for making the yen a major trading currencyin the region.

At present, 13 percent of China's total exports go to Europe.Like many other Asian countries, China has also said it plans toadd the euro to its currency reserves to diversify its basket ofcurrencies and reduce dependence on the U.S. dollar.

Beijing's moves would be significant, since its foreignexchange reserves are estimated at 141 dollars.

At the root of these fears are a wariness by Japan aboutBeijing, especially since it is in recession while Europeanleaders have been flocking to China.

Still, Japan - tired of being lambasted by the U.S. on tradepolicies, its recession and for not doing enough amid the Asiancrisis - should perhaps be glad that there is emerging apotential alternative to the U.S. dollar.

All told, analysts say the euro has allowed Japan itself tomove away from its heavy dependence on the U.S. In the weeksleading up to the euro's launch, Japan had begun selling dollarsand loading up on European currencies.

''Japanese investors will have another alternative in theforeign currency market,'' explained Landon. ''While the Japanesehave invested heavily in the U.S., a strong euro could provide ashift and also hurt the U.S. economy."

(Inter Press Service)

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