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Friday, March 26, 1999

Ex-Im economist sees dollar settling at 130 yen


Staff writer

An economist with the Export-Import Bank of Japan is forecasting that the yen will remain on the decline in the medium term due to Japan's weakening economic fundamentals.

In a year's time, the dollar could rise to 140 yen, the level it was at last summer, said Bernhard Fritz-Krockow, director of the bank's country risk and economic analysis department.

Fritz-Krockow worked for the International Monetary Fund for 10 years before assuming his present post at the state-run bank.

He also cited the Bank of Japan's easy money policy as a key downside factor for the yen.

After hitting 147.00 yen in mid-August, the dollar has given up much of its gains and is now hovering around 119 yen on currency exchange markets.

Huge government bond issues to finance the nation's pump-priming measures and the 7.46 trillion yen bank recapitalization program, which will be monetized through the Bank of Japan, will inevitably lead to a weaker yen, Fritz-Krockow said.

"If you add everything together, there is a huge increase in the balance sheet of the Bank of Japan," he said. "That (kind) of monetization (by the BOJ) has to lead to the depreciation of the yen's exchange rate," he said.

But by how much?

Fritz-Krockow said the extent of the yen's fall will depend largely on capital flows motivated by gaps in interest rates and expected economic growth rates between Japan and the United States.

The growth rate gap will narrow somewhat this year, and inflation rate differentials will not affect the gap, he said. "The inflation rate differentials are almost nothing," he said. "Contrary to what markets believe, the interest rate differentials are not going to grow much. Japan cannot go lower, and the U.S. cannot increase rates at this stage. So there is nothing to push more than 8 percent on the fundamental side."

The gap in growth potential between the two nations will be reflected in the yen's value, he said. Consequently, the yen will dip to 130 to the dollar around the middle of next year, according to Fritz-Krockow.

As the market tends to overreact, the yen will temporarily dive further, possibly reaching 140 to the dollar before settling at the 130 level.

While a depreciation of the yen would please the nation's export-oriented firms and the Finance Ministry, which has repeatedly frowned on a strong yen, the yen-dollar exchange rate will hit a hard-to-cross border when it reaches the 140 yen or 150 yen level, Fritz-Krockow said.

"There is a huge political and economic opposition to any exchange rate that goes beyond that," he said. "The U.S. will start screaming murder, they are already screaming murder."

"And Asian countries that are particularly dependent on Japan will also become vocal," Fritz-Krockow said. "In addition, China is going to (say), 'if you don't raise the yen's value, we are going to devalue the yuan.' So there is a limit to how much depreciation Japan can actually engineer."



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