Yen Weakening, Dollar Steady/Farrakhan Jude Wanniski and David Gitlitz April 10, 1997

The dollar is down more than three-quarters of a yen and nearly a full pfennig from the multi-year highs reached Wednesday, following official statements of “concern” about the greenback’s ascent by Japanese authorities. The notion that the G-3 financial authorities might be up to something was not dashed by Treasury Secretary Robert Rubin’s coy statement reiterating that the U.S. wants a strong dollar, but adding that he “shares the concern expressed by the Japanese authorities.” Thus, traders will be on guard for the possibility of official intervention, especially with a G-7 finance ministers’ meeting in two weeks, and a Clinton-Hashimoto summit April 25. For the Japanese, the yen’s fall in the past week from 122 to 127/dollar should have been enthusiastically welcomed. It allowed the currency’s real value -- expressed in terms of gold -- to climb closer than it has been in months to what we peg as an equilibrium level of ¥45,000 per ounce. The dollar’s forex rally since last fall had primarily reflected the dollar strengthening against gold from above $380 to below $350 per ounce. The yen’s fall from just under 110 to less than 120/dollar largely kept the yen gold price in a range around 42,000 per ounce. With gold steady at around $348, the yen movement in the past week represented a real yen weakening, with the gold price gold rising from 42,700 to 44,000.

As its banking system struggles to maintain solvency under the threat of real estate portfolio failures cascading through the financial system, and long-term bond yields of little more than 2% manifest the economy’s still-depressed real rate of return, the last thing Japan needs is a stronger currency. Indeed, for the first time since last summer, the Bank of Japan had resumed taking an aggressively reflationary posture with its liquidity injections over the last few weeks, no doubt contributing to the currency’s further decline. Concern over the international political consequences of a potential widening in its current account surplus appears to be at the heart of this latest act of Japanese self-flagellation. But the trade surplus reflects that the domestic Japanese economy remains in a weakened, deflation-prone condition, a condition that will in no way be improved by a reappreciation of the currency. Since rising to close to 23,000 last June from its deflation-depressed lows of 14,000 a year earlier, the Nikkei index has now fallen to 17,500, a 15% loss in terms of yen and a 33% decline in dollar terms. Finding a sustainable, non-deflationary value for its money is just the first step out of Japan’s mire. Reversal of the anti-growth policies instituted to pop the “bubble economy” of the late 1980s, particularly the capital gains tax on real estate, would provide a basis for optimism going forward. Unfortunately, such measures are not on the radar screen of the austerity-dominated Japanese political economy.

David Gitlitz

FARRAKHAN will have his major breakthrough into the white community on Monday, when he addresses a Philadelphia forum on race under the auspices of Democratic Mayor Edward Rendell. Rendell, who is Jewish, is gambling that Min. Farrakhan will be able to cool off his city, which has been simmering over a a racial incident in the Grays Ferry section last month, in which a crowd of white youths roughed up black teenagers walking through their neighborhood. A protest march was called by black leaders, including the Nation’s local leaders, and the Mayor invited Farrakhan to speak instead at a rally in downtown Philadelphia at 10:30 a.m. Monday. Rendell rejected criticism of Jewish leaders and said he’d viewed a videotape of a recent Farrakhan address and said it was “a fine speech.” It’s the first time in his 42-year ministry that Farrakhan has been called upon by a white community to help solve a racial problem.

Jude Wanniski