Stop Intervening: Greenspan

In what many consider an unusual display of criticism, US Federal Reserve Board Chairman Alan Greenspan claimed that Japan's currency market interventions – aimed at preventing the yen from falling against the dollar – will no longer be sustainable. The accumulation of dollar reserves must eventually end, he said, and argued that Japanese intervention has kept the dollar higher than it normally would have been. Japan claims that it must intervene to prevent the price of Japanese goods from rising, thus stalling its economic recovery. In 2003 Japan spent 20 trillion yen keeping its currency down, compared with the 5 trillion it spent 2002. Greenspan also mentioned China's interventions in his speech. Greenspan fears that once the deflation in Japan's economy ends, Japan's market interventions may come back to haunt it – rampant inflation, most likely. Just when the shadow of the last Asian currency crisis seems to have disappeared, is another on the horizon? – YaleGlobal

Stop Intervening: Greenspan

Currency market meddling brings warning from Fed chief
Thursday, March 4, 2004

NEW YORK (Kyodo) U.S. Federal Reserve Board Chairman Alan Greenspan on Tuesday warned Japan over its continued efforts to weaken the yen and bolster the dollar.

"The current performance of the Japanese economy suggests that we are getting closer to the point where continued intervention at the present scale will no longer meet the monetary policy needs of Japan," Greenspan said in a speech at the Economic Club of New York.

"As the present deflationary situation abates, the monetary consequences of continued intervention could become problematic."

It is unusual for Greenspan to make direct references to Japan's foreign-exchange policy; he usually states that currency issues should be handled by the Treasury secretary.

Japan has conducted massive yen-selling, dollar-buying intervention to stem the yen's rise against the dollar. Japanese policymakers claim the strengthening yen will adversely affects Japan's economic recovery by making Japanese exports less competitive.

Japanese monetary authorities used a record high 20.4 trillion yen in 2003 for intervention purposes, more than five times the 4 trillion yen spent in 2002, the Finance Ministry said.

Greenspan added that Japan and China have been accumulating dollar-denominated assets as a result of their "apparent attempt to prevent their currencies from rising against the dollar."

The Japanese private sector has exhibited limited interest in dollar and other foreign assets, showing interest mainly in domestic assets.

"In any event, it must be presumed that the rate of accumulation of dollar assets by the Japanese government will have to slow at some point and eventually cease," Greenspan said, noting the recent weakening of the dollar should help curb the swelling U.S. current account deficit.

If there had not been massive intervention by Japan and China, the dollar would have fallen more rapidly for an adjustment in the current account deficit.

"But a more likely possibility is that Asian currency intervention has had little effect on other currencies and that the trade-weighted average of the dollar is, thus, somewhat elevated relative to the rate that would have prevailed without intervention," Greenspan said.

Fukuda shrugs it off

Chief Cabinet Secretary Yasuo Fukuda said Wednesday he does not consider the warning by U.S. Federal Reserve Board Chairman Alan Greenspan against Japan's currency intervention as "criticism" of Japan's action.

"Various people are saying various things, but we do not think that (Greenspan) criticized us," Fukuda said.

The top government spokesman was asked by reporters about Greenspan's remarks Tuesday in New York that "continued intervention at the present scale will no longer meet the monetary policy needs of Japan."

Greenspan made the remark in a speech at the Economic Club of New York.

Fukuda said Japan will continue to "deal appropriately" with changing situations as needed.

Earlier Wednesday, a top Finance Ministry official declined comment on Greenspan's remarks, adding only that Japan will monitor the market carefully.

"No comment," Vice Finance Minister for International Affairs Zembei Mizoguchi said, adding that the "correction" in the dollar's excessive weakness is still continuing and that Japan is "monitoring the market carefully."

The dollar traded above 110 yen in Tokyo on Wednesday for the first time since Dec. 1, following its surge in New York overnight.

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