In this issue:

Japan, Eurozone Consider Joint Forex Interventions

Economist Warns vs. Chinese 'Plaza Accord'

From Volume 3, Issue Number 49 of EIR Online, Published Dec. 7, 2004

World Economic News

Japan, Eurozone Consider Joint Forex Interventions

Japanese and Eurozone authorities are considering joint foreign exchange interventions to prevent their currencies from rising too fast against the U.S. dollar, stated "a senior Japanese finance ministry official" according to London's Financial Times Dec. 2. The official, "speaking to reporters on condition of anonymity," said that such interventions have been discussed and would start if the dollar weakens further. The front-page FT feature adds: "Although he declined to comment on his European counterparts' response, he said a common eurozone view had emerged that the euro had reached levels that were harming Europe's economy." The official further expressed rage against Fed chairman Alan Greenspan, who on Nov. 19, intensified the slump of the dollar by describing the U.S. current account deficit as "untenable" and inflaming speculation in the markets that Asian central banks are about to dump U.S. assets.

In an interview to Reuters Dec. 1, Japanese Vice Finance Minister for International Affairs Hiroshi Watanabe noted: "Conditions are in place for Japan and Europe to be able to take harmonized action. It is natural for Japan and Europe to act when the dollar alone is falling." He then added: "If the [dollar's] movement affects the European economy and the Japanese economy, we should defend ourselves." Concerning criticism from the U.S. side, which insists that foreign exchange rates should be determined by markets only, Watanabe reacted with unusually harsh words: "We don't care what America says. We will defend ourselves." He then criticized U.S. pressure on China to float its currency, and said it made "no sense" to blame China for the U.S. current account deficit.

While these statements reflect growing desperation in Europe and Asia on the repercussions of the dollar crash, currency interventions—whether "harmonized" or not—do not pose any solution to the ongoing systemic crisis. In the fiscal year ending in March 2004, Japan spent the yen equivalent of $320 billion for currency interventions, by far the biggest such action in history. The net result of this giant operation is that the Japanese now own a huge pile of funny paper, which is rapidly losing value.

The last joint currency intervention took place in 2000, at that time to support the euro. When Japanese Finance Minister Sadakazu Tanigaki on Dec. 2 commented in a Bloomberg interview that Japan and Europe are not yet ready for joint actions, the dollar fell to a new all-time low against the euro ($1.34) and plunged below 102 yen for the first time since January 2000. On Dec. 1, the dollar hit a 12-year low against the British pound, which itself was falling in recent weeks against the other major currencies. The gold price on Dec. 1 shot up to $458.70, the highest level since June 1988. Earlier this week, the overall commodity price index of the Commodity Research Bureau (CRB), comprising everything from gold and oil to industrial metals and agricultural products, reached the highest level in 23 years.

Economist Warns vs. Chinese 'Plaza Accord'

China would be forced into a Japan-style "bubble" economy if it upvalues the renminbi/yuan to the dollar, warned Morgan Stanley Asia economist Andy Xie on Dec. 1, according to the Peoples Daily. Xie's warning against a Chinese "Plaza Accord" is not new: Many Chinese economists have warned this year of exactly that danger, should China yield to U.S., Japanese, and EU pressure to abandon its dollar peg.

If the reminbi appreciates under international pressure, Xie was cited by China Radio International, this will trap China, with low growth, low interest rates, and low inflation, but a strong currency. Xie said that the macroeconomic situation in China now, is like that of Japan when it was pressured to revalue the yen in 1985. This, Xie said, caused domestic enterprises to move out of Japan and into Southeast Asian nations. The low-interest-rate policy which followed this, created an economic "bubble," with over-investment in the stock market and real estate, from which Japan has yet to recover.

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