Sunday, February 15, 2004

Japan buying dollars at record pace to damp yen

By Audrey Mcavoy
The Associated Press

TOKYO - Japan is on an unprecedented spending spree, all focused on the same product: the U.S. dollar.

Tokyo bought an astounding $172 billion last year to keep the yen from strengthening too much against the greenback. The push only accelerated in January, when Japan snapped up another $67 billion.

That Japan's government is buying dollars to prevent a stronger yen from smothering a feeble economic recovery at home is not new. But the scale of the current round is far beyond its earlier interventions.

The purchases are so large that they are effectively subsidizing record U.S. budget and trade deficits, keeping American interest rates low and worrying some experts that a painful shock will hit if the spending spree stops.

"We are standing on a delicate balance," said legislator Kohei Ohtsuka, an upper house finance committee member and a former Bank of Japan official. "If this situation were a miniature model, it would be in danger of falling apart if we removed just one small part."

A key part of that model is the fragile Japanese economy, which has wallowed in the doldrums for more than a decade. The world's second-largest economy, however, has shown signs of recovery recently, built on increasing exports of cars, steel and electronics.

The decline of the dollar threatens that by making Japanese products more expensive in prime markets like the United States and China. So as other investors sold the dollar out of worries about burgeoning U.S. deficits, Japan has spent record amounts to buy it.

While that hasn't stopped the dollar from falling, it has limited its drop against the yen to 12 percent since January 2003. In contrast, the dollar sank 23 percent against the euro during the same period.

A byproduct of the policy has been a jump in Japan's holdings of U.S. debt as Tokyo has poured its new dollars into the Treasury market.

Japanese investors - mostly the government - bought a net $104 billion in U.S. debt between January and October, according to calculations by Japan's Nihon Keizai newspaper. That's a third of the $314 billion in fresh debt Washington issued during that period.

The dollar-buying spree is having side effects in Japan as well. U.S. investors are plowing cash into Japanese shares with cheap money borrowed in America, boosting the Tokyo stock market.

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