Yen should be globalized: Soedradjat

JAKARTA (JP): Bank Indonesia Governor J. Soedradjad Djiwandono suggested yesterday the internationalization of the yen in a bid to minimize the negative impact of its steep appreciation against the U.S. dollar on developing countries.

"The issue of the internationalization of yen is very relevant here," he told business executives at a seminar on the future of Indonesia-Japan business relations in the era of globalization.

The central bank governor said that the increase in yen holdings and yen-denominated transactions would automatically increase the pressure for the internationalization of the Japanese currency.

Soedradjad was apparently directing his remarks at Japanese businessmen, who have been widely criticized for their reluctance to use their own currency in their foreign transactions.

Indonesian exports paid in yen are less than 1.5 percent of total output, despite the large volume of Indonesian commodities sold to Japan. Ninety-six percent of exports are paid in dollars.

Soedradjad said that the implications of the yen appreciation on the foreign debt of countries such as Indonesia, China, Thailand and the Philippines were very significant.

To reduce the unfavorable impact of the yen's surge, Indonesia has changed the composition of its foreign exchange reserves, he said, adding that the yen's share had been expanded to 37 percent in May from 27 percent in March, 1993, and that the proportion of the U.S. dollar had been reduced to around 50 percent.

Soedradjad acknowledged that the yen's appreciation also had advantageous for Indonesia, despite its negative impact on the country's foreign debt, of which about 40 percent is denominated in the yen.

The surge in the Japanese currency had, for example, encouraged Japanese investors to relocate their factories in Indonesia, he said.

The yen has been rapidly appreciating against the U.S. dollar and other major currencies since the suspension of the world's fixed exchange rate system in 1971.

The dollar, which bought about 360 yen when the fixed rate arrangement was suspended, has dropped by more than three hundred percent, hovering between 80 and 85 yen at present.

The uncertainty about the direction of the exchange rate between the yen and other major currencies, according to the central bank governor, is mainly caused by the large influence of the market sentiment and the larger amounts of foreign exchange reserves being held outside the central banks.

He said that the foreign reserves held by the Bank of Japan had fallen sharply to seven percent at present -- down from about 80 percent in 1971.

"A similar trend is also occurring in other countries," he said, in discussing why monetary authorities are no longer able to influence exchange rates.

The foreign exchange reserves held by central banks around the world are only about $1.2 trillion, almost the same amount as the daily transactions among banks, he said.

The success of the efforts to influence the exchange rate has therefore come to depend very much on coordination among the world's central banks, he explained.

"Concerted efforts might work while an isolated venture was virtually a guarantee of failure in an attempt to influence the rate," he added.

In his speech at the seminar, organized by the Business Review Indonesia Forum and Japan's Keizei Koho Center of Keidanren, Soedradjad called on Japanese institutional investors to help prevent any massive pullout of portfolio investment from emerging markets such as Indonesia.

"The Mexican experience gave us a tremendous amount of lessons to learn," he said in a reference to the massive withdrawal of foreign funds from Mexico late last year.

Meanwhile, the Morgan Guaranty Trust Company Economic Research of the United States noted in its latest report that for three consecutive months, starting in April, the Indonesian rupiah has been appreciating against the American dollar.

That strength, according to the Morgan economic research note which was received here yesterday, is not normal because the standard movement over the past five years had been one of depreciation against the greenback.

It said the diversification of its export markets seemed to have prompted Indonesia to decouple the rupiah from the dollar and to let it strengthen, if not absolutely, then at least in the relative sense of depreciating at a slower-than-normal pace.

"Indeed, the slower depreciation in 1994 and the recent absolute appreciation, indicates a decoupling from the dollar, however informal," the report noted. (hen/vin)