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Thursday, Oct. 9, 2008

Japan may bail out U.S.: economist

Staff writer

With Tokyo stocks plunging and the yen surging against the dollar, the financial crisis born in the United States can no longer be regarded as just a problem on the other side of the ocean.

Economists are predicting that the Japanese themselves will be asked to share a huge burden with the rest of the world in the months to come.

Japan may be asked to help the U.S. with public funds as it moves to recapitalize its crumbling financial institutions, said Shinichi Ichikawa, a strategist at Credit Suisse in Tokyo.

"But it won't be easy for Japanese politicians to tell voters they will use taxpayers' money to save U.S. banks before the general election," Ichikawa said.

The Nikkei average plunged more than 9 percent Wednesday as local fears about the spread of the financial crisis deepened. The benchmark index closed at 9,203.32.

The dollar meanwhile fell below ¥100 for the first time in six months in Tokyo.

Ichikawa said there is more than a 50 percent chance that Japan will inject public funds into the U.S. financial sector after the Lower House election, which is expected as early as November. The call for the contribution is likely to come once the new U.S. president is elected Nov. 4, he said.

"That is one of the reasons why the finance minister is also serving as financial services minister," he said, referring to Finance Minister Shoichi Nakagawa.

With one person holding the two posts, it will be easier for Japan to inject funds into the U.S. financial sector, he said.

He also said a recovery in stocks is unlikely until the U.S. election.

Some economists are also predicting that the yen will rise even further because investors have lost confidence in the dollar and are scrambling to hedge their risk.

The euro, spurred by growing concerns about the spread of the crisis to Europe, has also dropped considerably against the greenback.

"It's a very quick development and I am perplexed," said Masaki Fukui, senior market economist at Mizuho Corporate Bank Ltd.

Fukui said the yen is likely to reach 95 — or even 90 — to the dollar, given the pace of the changes, and that the trend will continue until the U.S. takes a more comprehensive approach, such as injecting public funds into financial organizations.

Since this is not likely to happen until after the U.S. election, the dollar is unlikely to strengthen against the yen until next year, he said.

The consequences could be considerable. A strong yen will hit Japan's export-dependent economy hard, doing its part to tip the global economy toward recession.

On Wednesday, shares of Toyota Motor Corp. plunged on expectations that its operating profit will tumble drastically in the year through March.

"If the yen stays in the 90 range for long, it will severely affect the business of Japanese manufacturers," Fukui said.

BOJ injects trillions

Kyodo News

The Bank of Japan injected an additional ¥2.1 trillion into the Tokyo money market Wednesday as short-term borrowing costs rose between banks.

Tensions have been rising, especially in the overnight-borrowing markets, where the rates banks charge each other for loans rose due to lack of trust between counterparties amid the crisis.

The rate for foreign banks borrowing unsecured overnight call money stood at 0.65 percent at one point, well above the BOJ's official target of 0.5 percent.

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