G7 to remain vigilant but not support dollar: Sakakibara

by Mayumi Otsuma and Kyoko Shimodoi

Bloomberg

The Group of Seven nations will probably maintain their vigilance on currencies next week without committing themselves to supporting the dollar, said Eisuke Sakakibara, Japan’s former top currency-policy official.

G7 finance ministers and central bankers will probably repeat their language that excessive foreign-exchange movements are undesirable, Sakakibara, 67, said Thursday in an interview.

“The currency market isn’t in a crisis now, and G7 countries have never sent any strong messages on foreign-exchange rates based on the type of volatility we’ve seen recently,” he said.

The dollar has weakened 8.3 percent against the yen and 6.9 percent versus the euro this year as investors bet the Federal Reserve will keep cutting interest rates to avert a recession.

G7 officials will probably focus on measures to stabilize the financial system and markets at next week’s gathering in Washington, Sakakibara said.

“There won’t be any major changes in the language on currencies in the statement” to be published after the meeting, he said.

The February statement didn’t single out any currencies except China’s yuan, which it said should appreciate further.

On Friday, Finance Minister Fukushiro Nukaga said the G7 needs to reaffirm its stance on currencies at the meeting.

The officials from the U.S., Japan, Germany, Britain, France, Italy and Canada will exchange views on how to shore up the global economy and financial markets, he said.

Sakakibara, now a professor at Tokyo’s Waseda University, was dubbed “Mr. Yen” because of his influence on the foreign-exchange market during his 1997-1999 stint as vice finance minister for international affairs.

He correctly forecast in October that the dollar would plunge to ¥100 because of the risk of a U.S. economic slump. The yen reached a 12-year high of 95.76 on March 17 from an average of 115.92 in October.

The dollar rebounded against the yen and euro this week on speculation the world’s largest financial institutions will weather credit-market losses.

UBS AG and Lehman Brothers Holdings Inc. said they’re raising $19 billion to boost capital, helping stock markets in the U.S., Europe and Asia.

Sakakibara said Japan’s economic growth may be slower than 1 percent in the year ending March 31, 2009. The yen may still gain beyond 90 per dollar by the middle of the year because of narrowing gaps between Japan’s interest rates and those of other countries, he added.

“There’s still room for the yen to strengthen, though the dollar’s decline will be halted for a while,” he said.

The Fed will cut its benchmark rate to as low as 1 percent from the current 2.25 percent and the European Central Bank will trim its key rate from 4 percent to prop up growth, he said. The Bank of Japan’s rate is 0.5 percent, the lowest among the G7.

Even so, it’s unlikely that Japan, the U.S. and Europe will step into the foreign-exchange market together to influence their currencies, Sakakibara said.

“The market situation right now doesn’t warrant joint currency intervention,” he said. There’s also little chance that Japan will sell its currency in the market independently, or even make “verbal interventions,” he added.

The yen is still weak on a real-effective basis, or a measure against 15 currencies of Japan’s major trading partners, and that reflects the country’s competitiveness, Sakakibara said.

The U.S., while officially favoring a strong dollar, is comfortable with the currency’s decline because it is helping exports shore up the economy as the housing and financial industries suffer, he said.

European nations are struggling to cope with rising inflation so intervention to weaken the euro isn’t an easy option, the former currency official said.

Last month Nukaga and then-Bank of Japan Gov. Toshihiko Fukui said the yen’s gains have both merits and demerits.

While hurting exporters’ profits, a stronger currency makes imports cheaper, they said.

Japanese policymakers may underline the merits in coming years because prices of energy and raw materials will keep rising, squeezing companies in a country that has to import virtually all of its oil and most commodities, Sakakibara said.

“Even for Japanese manufacturers, for whom exports are important, import-price increases would hurt,” he said. “Some day we may hear Japan’s finance minister say a strong yen is in the national interest.”

Milestones in Yokoishi’s life

1979 — Joins agricultural cooperative (JA) in Kamikatsu, Tokushima Prefecture.

1986 — Starts selling “tsumamono” decorative leaves.

1996 — Quits JA and starts working at Kamikatsu town office; sales at co-op begin to decline.

1999 — Third-sector firm Irodori Co. is established; joins the firm’s board of directors.

2005 — Becomes Irodori’s vice president.