Rising yen could drive inflation rate up: Experts

Rising yen could drive inflation rate up: Experts

JAKARTA (JP): The rise of Japanese yen against the U.S. dollar is likely to mean another blow to the Indonesian economy, as import costs escalate and inflation rates climb while government resources are squeezed, local experts said yesterday.

"Since most of our imports from Japan are capital goods, we can expect, at least in the short term, the emergence of cost- push factors that will make the inflation rate creep upwards," Pande Radja Silalahi, an economist with the Center of Strategic and International Studies, told The Jakarta Post yesterday.

Rijanto Sastroatmodjo, a local banking expert, was quoted by Antara yesterday as saying that the appreciation of the Japanese currency would "create import inflation".

Official figures show that imports from Japan during the first ten months of last year reached about US$6.20 billion or 23.9 percent of the country's total imports.

Thanks to the oil and gas sector, Jakarta has enjoyed a trade surplus with Tokyo for several years.

However, a recent study by U.S. merchant bank Salomon Brothers said that the rising yen "may well decrease the portion of the trade surplus which does not reflect U.S. dollar-priced goods, such as oil."

Indonesia's inflation rate for the 1994 calendar year was checked at 9.24 percent, slightly lower than the 9.77 percent recorded in 1993.

Between January and March this year, the inflation rate was recorded at 3.04 percent, as compared with 3.71 during the corresponding period of last year.

Various rising costs and a likely repeat of last year's poor rice harvest have led some analysts to believe that Indonesia's inflation rate may be higher this year.

The U.S.-based investment house J.P. Morgan, for example, has made three different forecasts, or scenarios, for Indonesia in 1995.

Morgan's lowest forecast of this year's overall inflation rate is 10.5 percent, while the other scenarios predict rates of 12 and 13 percent respectively. These projections do not take account of the yen appreciation factor.

Tokyo

According to reports from the Tokyo foreign exchange market yesterday, the dollar gained ground on news that the U.S. trade deficit with Japan had shrunk in February.

The greenback was quoted at 81.60-63 yen in late afternoon trading in Tokyo, after hitting a new low of 79.75 yen early on Wednesday.

Pande said yesterday that, since the yen is an external factor, there is little that the Indonesian government can do about the situation.

"It is unfortunate that an external factor has gone against the Indonesian economy in such a strong way," he said.

"We can only hope that our importers have done some hedging in relation to this currently problem," he said.

However, an official of the Indonesian Importers Association warned that some of their members might not be able to come to terms with the escalating yen.

"A big chunk of Indonesian imports from Japan go to our automotive sector, which is dependent on Tokyo for its spare parts supply. However, I doubt that sector has sufficient flexibility to turn to other suppliers," Amirudin Saud, chairman of the association, told the Post yesterday.

The Indonesia Automotive Industry Association was not available for comment yesterday.

Optimism

The fears of rising inflation brought about by the rising yen were not, however, shared by David Chang, director of research at PT Sigma Batara Securities.

"We have to note that most of our Japanese imports do not constitute a significant part of the consumer price index basket, which is the basis for forecasting and measuring inflation," he told the Post by telephone yesterday.

"The real worry, in relation to inflation, is not Japanese imports, but things like cement prices, which have been climbing recently," he said, adding that he was optimistic that the inflation rate this year will stay within single digits.

Chang was also dismissive of recent expressions of great anxiety concerning the effects on Indonesia's foreign debt burden of the falling dollar.

According to the Ministry of Finance, Indonesia's foreign debts stood at $87.6 billion as of last December, a majority of which were long-term public debts. About 40 percent of the government's loans were denominated in yen.

"Look, Indonesia has never rescheduled its loans since 1967 and it has a very solid political leadership which gives clear directions regarding the debt problem," he said, adding that the rising yen might even encourage Indonesia's exports and the arrival of foreign direct investment.

Chang pointed to Standard & Poor's recent decision to upgrade its long-term foreign currency rating of Indonesia to triple B (BBB) from triple B minus (BBB-). (hdj)