Friday, November 05, 2004

When will the Bank of Japan pull the trigger and start supporting the dollar? Robert Feldman at Morgan Stanley thinks it could be a while further.
A stronger yen would be a moderate negative for Japan, but it must be emphasized that the yen is not strong at the Y106/US$ level at the moment. After all, over the last 10 years, the gap between inflation differentials between Japan and the US has been about 25 %-pts. Thus, the yen/dollar rate of Y80/US$ of 1995 would correspond to Y60/US$ today. The weakest point of the yen in 1998 at Y147/US$ would correspond to about Y120/US$ today. So Japan could likely withstand a moderate appreciation of the yen/US$ rate will little major disruption. True, the fixed link of the renminbi to the US dollar would make Chinese products even more competitive in Japan as the dollar weakens. However, China is already so competitive in labor intensive industries that a few more percentage points would not change the situation significantly.
While some have been saying that �105 or �100 is the trigger (as I type, the rate is $1=�105.8), Feldman seems to suggest that the dollar could fall well below �100 before the Bank of Japan starts getting an itchy trigger finger.

We'll know more on Monday when the US Treasury starts dangling $51bn in debt before the market's eyes.


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