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Excerpts from Greenspan's speech on Japan's forex intervention.

NEW YORK, March 2 Kyodo

The following are excerpts from a speech by U.S. Federal Reserve Board Chairman Alan Greenspan to the Economic Club of New York on Tuesday.

I refer to the heavy degree of intervention by East Asian monetary authorities, especially in Japan and China, and the apparent stepped up hedging of currency movements by exporters, especially in Europe. As all of you who follow these markets are aware, since the start of 2002, the extraordinary purchases by Asian central banks and governments of dollar assets, largely those by Japan and China, have totaled almost $240 billion, all in an apparent attempt to prevent their currencies from rising against the dollar. In particular, total foreign exchange reserves for China reached $420 billion in November of last year and for Japan more than $650 billion in December.

The awesome size of Japan's accumulation results from persistent intervention to suppress what Japanese authorities have judged is a dollar-yen exchange rate that is out of line with fundamentals. One factor boosting the yen is a significant yen bias on the part of Japanese investors. This propensity, in my judgment, runs far beyond the normal tendency of investors worldwide to buy familiar domestic assets and eschew foreign-exchange risk.

Nowhere else in the world will investors voluntarily purchase 10-year government obligations at an interest rate of 1% or less, especially given a rate of increase in the outstanding supply of government debt that has generally been running at 9% over the past year. Not surprisingly, very few Japanese government bonds (JGBs) are held outside of Japan.

Aside from the holdings of the Bank of Japan, almost all JGBs are held by Japanese households, banks, insurance companies and the postal saving system. And none of them holds significant amounts of foreign assets; 99% of household assets are in yen, and, including the postal saving system, about 91% of the assets of financial institutions are in yen. Japanese nonfinancial corporations do hold a larger share of foreign assets in their securities' portfolios, but the absolute amounts are small.

The Japanese have made significant foreign direct investments, especially in the United States, and the Ministry of Finance does, of course, hold large dollar balances as a consequence of exchange rate intervention. But the Japanese private sector, by and large, has exhibited limited interest in accumulating dollar or other foreign assets, removing what in other large trading economies would be a significant segment of demand for foreign assets.

The degree of domestic currency bias in Japan, which far exceeds that of its trading partners, may thus have contributed to a foreign exchange rate for the yen that appears to be elevated relative to the dollar and possibly other internationally traded currencies as well. Of course, this preference for yen assets, while a persistent influence on the value of the yen, has at times been overwhelmed by other factors.

Granted the level of intervention pursued by the Japanese monetary authorities has influenced the market value of the yen, but the size of the impact is difficult to judge. In any event, it must be presumed that the rate of accumulation of dollar assets by the Japanese government will have to slow at some point and eventually cease.

For now, partially unsterilized intervention is perceived as a means of expanding the monetary base of Japan, a basic element of monetary policy. (The same effect, of course, is available through the purchase of domestic assets.) In time, however, as the present deflationary situation abates, the monetary consequences of continued intervention could become problematic.

The current performance of the Japanese economy suggests that we are getting closer to the point where continued intervention at the present scale will no longer meet the monetary policy needs of Japan.
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Publication:Japan Weekly Monitor
Date:Mar 9, 2004
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