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Wednesday, Dec. 17, 2008

Keep intervention option open: Gyohten

Staff writer

Monetary authorities in Japan and other nations should consider market intervention when the yen sharply rises against the dollar, according to Toyoo Gyohten, former vice finance minister for international affairs.

News photo
Currency don: Toyoo Gyohten, president of the Institute for Monetary Affairs, is interviewed Friday in Tokyo. YOSHIAKI MIURA PHOTO

Gyohten, once deemed part of the "Currency Mafia" because of his expertise on monetary affairs when he served in the post in the 1980s, is proposing that intervention is useful when the market drastically fluctuates on speculative and psychological factors to the point of threatening the entire economy.

When the dollar plunged to a 13-year low of ¥88.16 last Friday, a senior Finance Ministry official warned of intervention in the foreign-exchange market.

Market intervention would serve as shock treatment, just like "pouring water on a drunk," Gyohten, who now serves as president of the Institute for International Monetary Affairs, said Friday.

Gyohten was also appointed as a special envoy of Prime Minister Taro Aso to the U.S. and Europe for last month's global financial summit in Washington.

To make forex market intervention effective, Gyohten said it should only be carried out when the market is not reflecting real economic conditions.

Monetary authorities in other nations need to share concerns about the market, and jointly and drastically intervene, he said.

Gyohten meanwhile did not elaborate on whether Japanese and other authorities should intervene now or in the near future, stressing it is up to the Finance Ministry to make that judgment.

While voices are rising that the Bank of Japan should slash its interest rate in its Policy Board meeting this Thursday and Friday, he said a rate cut would probably not have a big impact on the economy.

"Even if (companies) do not have to pay 0.1 percent or 0.2 percent in interest (because of a BOJ rate cut), they will not immediately use (the savings) to expand investments in plants and equipment," Gyohten said. "In the case of Japan, there will not be much effect even if (the BOJ) lowers its interest rate further."

The central bank is expected to discuss whether to lower its benchmark rate, now at 0.3 percent, following a drastic slide in business sentiment.

The business confidence of large manufacturers suffered its steepest fall in 34 years as the global financial crisis eroded profits, the latest BOJ "tankan" survey showed Monday.

Looking back at the economy this year, Gyohten described it as "shocking."

After the subprime loan crisis began in summer 2007, there was optimism at one point that the financial market turmoil would end, Gyohten recalled.

However, major U.S. financial institutions as well as European banks and securities houses collapsed and the credit crunch ensued.

Due to the credit squeeze, the financial system no longer functioned, Gyohten said.

The global financial crisis had a big impact on the real economy as well. Corporate sales dropped, causing companies to scale down business, slash jobs and cut back on investments.

As demand in the U.S. cooled, countries worldwide suffered plunges in exports. Stock prices crashed and capital fled, he said.

The turmoil of the financial market and real economy rapidly spread globally, Gyohten pointed out, adding there is little chance the economy will improve at least in the first half of next year, as it will take time for the U.S. housing market to recover.

In the meantime, the government should take drastic measures to finance small and midsize companies, prevent firms from collapsing and secure employment.

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The Japan Times

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