Yen should be globalized: Soedradjat

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)