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By ANTHONY ROWLEY |
WHETHER a studied statement, an off-the cuff comment or a veiled threat, Japanese Finance Minister Sadakazu Tanigaki's suggestion last week that Japan could diversify part of its huge foreign exchange reserves into gold has had international reverberations.
It has brought home once more the fact that the vast dollar reserves which Japan and the rest of Asia hold are a Sword of Damocles for the dollar and the US Treasury market. The impact of such a move on the dollar would be severe. And as Japan has a third of total US Treasury securities held outside the US, the impact on the bond market would also be severe. Mr Tanigaki's statement (in answer to a question in Parliament) that he felt it necessary to take a view on the future composition of Japan's foreign exchange reserves (the bulk of which are in dollars), and that this might include a review of gold holdings, comes at a time when other Asian nations have been expressing concern about their vulnerability to the dollar. It also occurs when Asian central banks (the People's Bank of China for one, an informed source told BT) are expressing strong interest in gold. Asian monetary authorities are working too on laying the foundations for an Asian Bond Market which would provide the infrastructure through which the region could reduce its dependence on the dollar and the US Treasury market, and provide a means for the region to deploy its own savings without channelling them offshore.
Mr Tanigaki's comments were thus timely even if, as a senior Japanese Ministry of Finance official claimed to this correspondent, it would be wrong to infer any immediate action on Japan's part. There is, in fact, a powerful argument why Japan cannot move out of dollars for the time being. This is because it needs to buy dollars, rather than sell them, so long as it pursues its current policy of also buying economic recovery through exports. The MOF spent a record 20 trillion yen (S$321 billion) last year in propping up the dollar against the yen and in the first month of 2004 alone it has spent an incredible seven trillion yen more. The dollars it acquires are then invested back into securities of the dangerously indebted US government. This is an absurd situation, rather like a shopkeeper lending ever larger amounts of money to an important customer who is also a profligate spender, so that he can maintain consumption. The customer signs ever-increasing amounts of IOUs or bills and the shopkeeper has decreasing faith in these. But he cannot sell them so long as he retains his dependence on keeping the customer happy. It is a delicate and dangerous balancing act, and one might wonder why a Japanese finance minister should risk upsetting it, as Mr Tanigaki did. It may have been pure naivety. But it would be dangerous to bank on it. This is not the first time that Japan has issued veiled threats to the US that it is capable of retaliating if the exchange rate weapon is deployed (as Treasury Secretary John Snow appears to be doing now through his policy of benign neglect for the dollar). There was an occasion in 1996 when former Japanese prime minister Ryutaro Hashimoto pondered out loud during a visit to New York about what might happen if Japan were to reduce its (even then) large holdings of US dollar securities. Washington appeared to get the message and the severe upward pressure that the yen had been subjected to eased off. Mr Tanigaki, according to some schools of thought, may have been issuing a similar veiled threat ahead of this week's G7 finance ministers' meeting in Florida. Alternatively, the minister may have been floating a trial balloon to see what impact it would have on the gold, foreign exchange and US Treasury bond markets. As it happened, very little, even though as UBS commented, Mr Tanigaki's remarks may be the biggest story in the official gold sector for many years. The dollar paid more attention to hints by the US Federal Reserve that it could raise interest rates sooner rather than later. The Treasury bond market also seemed too preoccupied with domestic events to notice the remarks. The fact is, however, that at some time the threat of Asian governments running down their colossal dollar holdings (which constitute the bulk of the US$1.9 trillion of official foreign exchange reserves held in Asia) is going to crystallise. It could happen if Japan's economy is moving, as some economists suggest, beyond total export dependence towards a broader-based domestic recovery. Or it could happen if rising US interest rates stall growth and demand for imports. But happen it surely will and reshaping the dangerous structure of mutual dependence between East Asia and the US should be top of the agenda for the G7. The writer is BT's Tokyo correspondent
