December 4, 2004
Dollar's Fall Tests Nerve of Asia's Central Bankers
Mr. Asakawa, 46, is the top official at the Finance Ministry here responsible for managing the largest portfolio of
But Mr. Asakawa, at least for now, says that he intends to keep right on adding American holdings to Tokyo's portfolio.
"We've heard the rumors in the last few days that the Chinese guys, the
Still, Mr. Asakawa admits that he has not been sleeping so well lately.
"This thing wakes me up; it is terrible," Mr. Asakawa said in excellent American-accented English - he once studied at Princeton - as he toyed with a blue plastic portable currency monitor. After hours, the wireless device beeps by his bedside whenever the dollar strays beyond a set range. "Fortunately," he said, "my wife is very understanding."
Mr. Asakawa has been waking up a lot more often because the long-running symbiotic relationship between Asia and the United States has started to fray.
For years, manufacturers in
By doing so, they helped keep interest rates in the United States low and the dollar relatively strong. That allowed Americans to borrow cheaply and fill their shopping bags with yet another load of well-priced goods imported from Asia. Low interest rates also enabled Washington to readily finance the federal government's gaping budget deficit.
But as borrowing by the United States from abroad has soared this year to $620 billion, a record 5.7 percent of overall economic activity, many foreigners have become reluctant to keep accumulating dollars at the same pace. That has left officials like Mr. Asakawa and others at central banks elsewhere in Asia holding America's purse strings.
Japan's total stockpile of foreign currency, at $817 billion, is still the largest in the world, but China, which now owns about $600 billion, is catching up fast.
Among countries that are accumulating dollars - especially China - grumbling is on the rise that Washington should do more to protect the value of their investments by cutting the budget deficit and adopting other policies to slow or reverse the dollar's decline.
"Shouldn't the relevant authorities be doing something about this?" asked Prime Minister Wen Jiabao of China at a conference in Laos last Sunday.
Generally lacking any financial experience outside China, they sit at trading stations around a gold stand bearing a jeweled globe, two feet in diameter and with seas of lapis lazuli, in a rented room on the fourth floor of an insurance building.
Most of the money in China's central bank coffers has accumulated in the last four years, the product of an investment torrent washing over China and the ever-expanding flood of goods pouring out of Chinese factories.
As in Japan and China, small groups of civil servants in Taiwan and South Korea are struggling to invest sizable foreign currency reserves of $235 billion and $193 billion, respectively. For years, all four countries have held the bulk of their reserves in the Treasury bills, notes, and bonds that finance the federal budget deficit, leaving American consumers and companies free to spend more on other things and invest their spare cash in more promising ventures.
Together, these Asian institutions are responsible for holding roughly 40 percent of the American government's public debt.
In contrast to Japan, China's money managers, while selling little of their existing Treasury holding, have not been buying much more. China's foreign currency reserves rose by $111.3 billion in the first three quarters of the year, according to official Chinese data. But its Treasury holdings, American filings show, climbed by only $16.4 billion.
Instead, officials at the State Administration of Foreign Exchange in Beijing have been seeking higher yields by plowing billions of dollars a month into bonds backed by mortgages on houses across the United States, according to bankers who help Beijing manage the money. By helping keep mortgage rates from rising, China has come to play an enormous and little-noticed role in sustaining the American housing boom.
The proportion of China's hoard in Treasury securities has dropped to about 35 percent, they say, compared with the roughly 90 percent of Japan's foreign currency reserves still parked in Treasury securities.
Some bankers and economists say that dollar-denominated securities over all represent a slowly declining share of China's recent purchases. But no figures are available on how quickly Beijing may be shifting to other currency holdings, so its effect on the underlying demand for dollars is unclear.
Still, the American reliance on foreign money and the investment decisions of bankers halfway around the world underline a serious risk for the economy: What would happen if this deep investment pool was used to fill coffers elsewhere in the world, perhaps in
With the dollar trading in recent days around five-year lows against the Japanese yen,
A Chinese central banker, Yo Yongding, also caused a brief dive for the dollar on Nov. 26 by making remarks that were initially translated as a statement that Chinese dollar holdings were dropping. The banker later issued a statement that he had noted only that the value of Chinese-held Treasuries had dropped with the falling value of the dollar.
For all the interest in the other players, currency markets remain focused on Japan, which has aggressively bought dollars, doubling its investment in Treasuries over the last two years. During a 15-month period that ended in March, the Japanese government bought $340 billion of dollar-denominated securities with its yen. The buying spree so stunned speculators that Japan has not had to intervene in the markets since.
But now with Japan's huge stake in the dollar losing value, the question is, What will Tokyo do next?
The problem for Japan is that it is in so deep that to a large degree it is chained to its American debtor.
"Imagine that tomorrow people hear, 'Hey, Japan has decided to divert from U.S. dollars to euros,' " Mr. Asakawa said. "That would create a hugely undesirable impact on the U.S. Treasury market, and we have no intention at all to make an unfortunate impact on the U.S. Treasury market."
Any selling move by Japan would move the entire market - and cut further into the value of Japan's own portfolio.
Richard Koo, chief economist for the Nomura Research Institute, is one of many financial soothsayers in Tokyo who work to divine the thinking behind the shabby door on the fourth floor of the gray pre-World War II Finance Ministry building marked Director of Foreign Exchange Markets.
As he sees it, anything Japan might do to slow its dollar purchases would only create a self-inflicted wound. "If they could move it all out of dollars in one day, I am sure they would do it in an instant," Mr. Koo said. "But if they move 10 percent, and the dollar goes down 20 percent, they are stuck with 90 percent of the portfolio worth 20 percent less."
Others in Japan are not happy about how much the dollar has already weakened. Toyota, Japan's largest company and its biggest exporter, complains that for every 1-yen gain against the dollar, the company's annual profit falls by 20 billion yen, currently $195 million. With Japan's economic recovery still lagging, its dollar buying serves to help keep its exports more competitive.
This week, Japanese officials have been talking up the dollar and leaving the door open to a resumption of specific dollar-strengthening moves. On Wednesday, Mr. Asakawa's boss, Hiroshi Watanabe, vice minister for international affairs at the Finance Ministry, responded to a question at a news conference about intervention saying, "There is nothing to limit our actions; there are no such concerns."
Japan and China hold too much American debt to be able to diversify discreetly. Instead, they are urging the Bush administration, in public and private, to get the American budget into better balance and to improve American saving rates.
"What China and Japan are trying to do is say, 'Please get back on track with fiscal reform,' " said Robert A. Feldman, chief economist for Morgan Stanley Japan.
China, more than many countries, treats its foreign currency reserves as not just a way to control the value of its currency in international markets but also as a form of national savings. That is one reason its traders are encouraged to take greater risks in search of higher returns.
China used $45 billion from its stash to bail out the state-owned Bank of China and the China Construction Bank last winter. People close to Chinese policy makers predict that another $50 billion to $60 billion will be used this winter to bail out the much larger Industrial and Commercial Bank of China, also state-owned, and possibly a smaller sum to help the Agricultural Bank of China.
The Chinese government currency traders, bankers say, have refrained from the kind of highly speculative trading that led to the $550 million in losses disclosed this week by the China Aviation Oil (
An important job for such teams involves taking Chinese traders to dinner, Western bankers say, as the Chinese are not allowed to accept gifts. So fee-hungry bankers fly regularly to Beijing from Hong Kong - some making the trip practically every week - to take traders out for lavish evenings.
For some, one banker said, this duty can become wearisome. The Chinese traders enjoy bowling, he said, but they also have a reputation for wanting to attend Mandarin romantic operas, an acquired taste at best.
James Brooke reported from Tokyo for this article and KeithBradsher from Hong Kong.