Japan concerned over rapid rise of U.S. dollar

Japan concerned over rapid rise of U.S. dollar

TOKYO (AFP): Japanese are starting to worry about the impact of the dollar's new-found strength on the economy, with Prime Minister Ryutaro Hashimoto expressing concern yesterday about rapid movements of the U.S. unit.

"It's not good for a currency to fluctuate rapidly," Hashimoto told reporters, preferring instead exchange rate movements "within a certain range. "

The prime minister was referring to the dollar's advance past 110 yen here Tuesday, its strongest level in 29 months and representing a 38 percent increase in value against the yen since its fall below 80 yen a year ago.

The dollar held above 110 yen here throughout yesterday, moving from 110.16 yen to 110.37 yen. It was at 110.29 yen in late trading.

Analysts say the Japanese economy will be able to stave off possible negative impacts from a higher dollar if the currency stays at around 110 yen, but further appreciation could be damaging.

"At the 110 yen level, we will start seeing not only favorable effects but also negative effects on the economy, but the problems are not so bad at 110 yen," said Tokyo Research Institute analyst Toshio Sumitani.

"But if it goes up to 115 yen, it's not going to be easy for the economy," Sumitani said, referring to upward pressure on prices and interest rates, as well as the possible adverse impact on corporate earnings.

Bank of Japan governor Yasuo Matsushita told a regular news conference the dollar-yen rate was moving "in the trend expected by the G7 (Group of Seven industrialized countries)."

Matsushita said he saw "little possibility that the rising tempo in domestic prices will strengthen" due to the decline of the yen against the dollar, although it has sent import prices firming since April.

Nikko Securities Co. Ltd. said in a survey yesterday the higher dollar would boost Japanese manufacturers' earnings, while depressing the performance of non-manufacturers.

At 110 yen to the dollar, manufacturers would post an average 24.1 percent rise in pre-tax profits for the year to next March, but non-manufacturers would suffer an average 3.0 percent profit fall, it said.

The gap between the two sectors would widen at 115 yen, with manufacturers seen enjoying an average 33.9 percent year-on-year profit growth while non-manufacturers would have an average 4.7 percent decline.

Carmakers are expected to benefit most from the higher dollar, with pre-tax earnings estimated to increase by 35.5 percent at 105 yen, by 47.1 percent at 110 yen and by 58.8 percent at 115 yen, according to the research arm of Nikko Securities.

But oil distributors, along with utilities, are seen suffering a major setback in earnings as the dollar advances against the yen.

Nikko Research estimates pre-tax profits of oil companies will drop 25.2 percent at 105 yen, 46.7 percent at 110 yen and 68.2 percent at 115 yen.

Tetsuro Sawano, an economist at Nikko Research, said the dollar's appreciation to 110 yen would have "no immediate effect" on the economy.

"While import prices are rising, domestic prices overall are still largely stable. So the Bank of Japan is not likely to change its easy monetary policy soon if the dollar-yen rate remains at the current level," Sawano said.

"But if the dollar goes up to 115-120 yen, the central bank will have no choice but to raise the key interest rate" from the record low 0.5 percent, a step that may dampen Japan's economic recovery that has become evident in the recent months, he said.

Sawano also warned the dollar's excessive appreciation would disrupt ongoing "structural reform" efforts by Japanese manufacturers to make themselves less vulnerable to exchange rate fluctuations.

"Following the yen's advance to record highs last year, Japanese manufacturers have been trying to better balance imports and exports. The dollar's further appreciation would put a damper on these efforts," he said.