JAPAN: THE RAPID RUN ON DOLLAR ASSETS--scary stuff

4//Asia Times Online October 10, 2003

http://www.atimes.com/atimes/Japan/EJ10Dh01.html



JAPAN: THE RAPID RUN ON DOLLAR ASSETS

By Hussain Khan

TOKYO - With the Nikkei stock average currently flirting with 11,000, up about 45 percent from its post-bubble 13-year low of 7,607.88 in April, it is starting to appear that a run on US dollar assets could well be causing the rise in Japanese stock markets.

The yen has surged through the psychological barrier of 110:US$1, creating a sense of crisis as the run on dollar assets gains momentum. Japanese authorities are cautious about intervening heavily before Prime Minister Junichiro Koizumi reaches an understanding on the currency in his meeting with US President George W Bush on October 17-18 in Tokyo.

According to one estimate, by Kyoto University Economics Professor Takamitsu Sawa, foreign investors have markedly improved the fundamentals of the Japanese economy by turning into huge net buyers of more than US$1.7 trillion in Japanese equities and assets and, by running away from their dollar positions, are thus generating a self-feeding cycle of further selling dollar assets and pushing up the Japanese markets even more.

The flight of global investors from the dollar has serious implications, not only for the health of markets such as Japan's, but because of the peril to the US economy and thus the global economy as well, for which the United States has acted as economic engine and importer of last the resort. The US must take in $55 billion per day in investment in government paper and securities to fund the enormous deficits in its fiscal budget and its current account, the total balance of goods and services it trades with other countries. The current account deficit is expected to hit more than $540 billion in 2003, with the fiscal deficit trending towards $600 billion when off-budget liabilities are factored in.

However, since the events of September 11, 2001, fiscal and military decisions by the administration of President George W Bush have raised concerns (see The end of American economic supremacy?, Sep 19) by both US fund managers and individual investors about the long-term health of the American economy. By diverting their investments outside the United States, these fund managers are corroborating a bleak long-term view of declining US economic strength, gradually running away from dollar assets to buy other assets or currencies like the euro, the yen and the yuan.

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Asian markets are really enjoying the windfall of the run from the dollar.

It'll be interesting to see how our administration's Jekyll-and-Hyde ham-fisted approach to international economics deals with this.