SANTIAGO – U.S. President George W. Bush unexpectedly mentioned the need for a strong dollar when he met Saturday with Prime Minister Junichiro Koizumi.
Japan has grown increasingly concerned that the yen’s renewed rapid rise against the dollar may derail the economic recovery by throwing cold water on exports.
Bush’s reference to his commitment to the strong-dollar policy, in his first meeting with Koizumi since he was re-elected Nov. 2, appears to have given a helping hand to the prime minister, symbolizing their continued close relations.
But the real intention behind Bush’s remarks may be different.
Ahead of the Koizumi-Bush meeting, which was held on the sidelines of the annual Asia-Pacific Economic Cooperation forum, a Japanese official said the currency issue wasn’t likely to come up, with Koizumi having no intention of raising the topic.
But Bush assured Koizumi there is no change in the U.S. policy of favoring a strong dollar, remarks which Japan expects to help put a cap on the yen’s surge.
After the meeting, Bush told reporters he told Koizumi “my nation is committed to a strong dollar.”
Koizumi, appearing before the media with Bush, immediately welcomed the president’s remarks.
“I completely agree with the view of the president that a strong dollar has a good impact on the U.S. economy and is also important for the world economy,” Koizumi said.
In talks with Koizumi at his ranch in Crawford, Texas, in May 2003, Bush also mentioned the strong-dollar policy. At that time, Bush added that foreign exchange rates should be formulated through market forces, signaling opposition to government intervention.
This time, however, Bush did not refer to the importance of leaving exchange rates to market forces and instead vowed efforts to reduce “our short-term and long-term deficit.”
The “twin” U.S. deficits are widely believed to be behind the dollar’s recent fall against the yen and other major currencies.
The U.S. is incurring a record-high budget deficit due to the large tax cuts Bush implemented and swelling costs for the war in Iraq. Bush has vowed to cut the budget deficit in half over the next five years.
The nation’s deficit in the current account, the broadest measure of trade, has also hit an all-time high. This deficit has to be financed by investment from foreign countries.
The dollar briefly fell to the 102 yen level Friday in New York for the first time in nearly five years on a warning from U.S. Federal Reserve Board Chairman Alan Greenspan that foreign demand for U.S. assets, which has financed the massive U.S. current account deficit, would eventually fall.
“It seems pervasive that, given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point,” Greenspan said in a speech Friday at a European bankers’ conference in Frankfurt.
Greenspan also said there is a need for the United States to reduce the budget deficit, saying such a reduction would increase domestic savings to finance the current account deficit.
Bush’s mention of the strong-dollar policy with Koizumi apparently shows that the U.S. is beginning to be seriously concerned about a possible free fall of the dollar, which would trigger an exodus of funds from U.S. assets.
At the moment, U.S. concerns happen to be consistent with worries harbored by Japan about the adverse impact of the yen’s rapid appreciation.
But this does not necessarily guarantee that the interests of Japan and the United States on foreign exchange will continue to be shared.
Although it is cautious against a rapid fall of the dollar, the United States is expected to tolerate a moderate decline in its currency because it would boost the international competitiveness of U.S. industries.
In the face of the yen’s renewed surge against the dollar, meanwhile, Japanese officials have expressed readiness to resume intervention if necessary to stop the trend.
In 2003 and early 2004, Japan repeated massive yen-selling, dollar-buying intervention to halt the yen’s appreciation, a practice that drew sharp criticism from U.S. manufacturers.
The manufacturers criticized Japan for keeping the yen artificially low to maintain the competitiveness of Japanese exporters.
Since mid-March, Japan has refrained from intervention partly because the market has stabilized.
If the yen accelerates its upswing against the dollar and Japan steps into the market, it would create friction with the United States at a time when bilateral economic relations are relatively stable without major issues.
The possible resumption of massive market intervention would also run against an accord among the Group of Seven countries on the importance of more flexible market-based exchange rates.
The G7 groups Britain, Canada, France, Germany, Italy, Japan and the United States.
In the Frankfurt speech, Greenspan said massive intervention in foreign exchange markets may help calm currency moves somewhat but has no lasting effect.
“Large interventions . . . do not create very large increases in exchange rates of a protracted nature,” Greenspan said, due to the “high level of sophistication of the markets,” which tends to dilute the effect of any intervention.