Gyohten Says Japan Should Support Dollar’s Key-Currency Status
Sept. 29 (Bloomberg) -- Japan’s government should support the U.S. dollar’s status as the world’s reserve currency, according to a former top currency official who will become an adviser to Finance Minister Hirohisa Fujii today.
“There’s no better alternative to the dollar,” Toyoo Gyohten, 78, said in an interview yesterday in Tokyo. “Making it as stable as possible would be the best policy option at the moment.”
Gyohten’s comments suggest the Democratic Party of Japan, which came to power for the first time this month, may toe the policy line of the former government of supporting the dollar’s hegemony and buying U.S. government debt. European Central Bank President Jean-Claude Trichet said yesterday a strong dollar is “extremely important” for the global economy.
China, India, Brazil and Russia this year called for a replacement to the dollar as the main reserve currency after the financial crisis sparked by the collapse of the U.S. mortgage market led to the worst global recession since World War II. World Bank President Robert Zoellick said yesterday the currency’s dominance will be challenged as the financial crisis reshapes the global economy.
“There is every reason to believe that the euro’s acceptability could grow,” Zoellick said. “Of course, the U.S. dollar is and will remain a major currency. But the greenback’s fortunes will depend heavily on U.S. choices” on inflation, the budget deficit and financial oversight, he said.
Japan’s former Finance Minister Kaoru Yosano said in June that the dollar’s position as the world’s reserve currency “isn’t under threat.” Japanese investors are the biggest foreign holders of Treasuries after China with $724.5 billion of the securities in July.
Special Drawing Rights
China, whose foreign-exchange reserves topped $2 trillion for the first time in the second quarter, said a supranational currency such as the International Monetary Fund’s special drawing rights, or SDRs, may add stability. Gyohten said that SDRs are unlikely to replace the dollar.
“SDRs are an artificial currency,” said Gyohten, who served as vice finance minister for international affairs from from 1986 to 1989. “In fact, it might be impossible to make them the only reserve currency.”
The trade-weighted Dollar Index has fallen 11 percent since President Barack Obama’s inauguration in January, in part because of a budget deficit projected to rise to $1.6 trillion this year as the government increases spending to boost the economy.
Gyohten said while it won’t be easy for the U.S. to improve its trade and budget deficits, the nation may be able to earn credibility from global investors if the government shows its commitment to tackle these problems in the longer term.
Fiscal Discipline
“I believe the U.S. economy has the ability to self- correct and self-discipline,” Gyohten said. He added that concern about the currency’s status as a reserve currency won’t emerge if the U.S. can maintain fiscal discipline.
Gyohten, now president of the Tokyo-based Institute for International Monetary Affairs, also said Japan needs to expand domestic demand in the long run. The DPJ’s plan of reducing Japan’s reliance on exports by spurring demand at home could help correct global imbalances, he said.
The Japanese currency jumped to an eight-month high against the dollar yesterday as comments by Fujii spurred speculation that his party may tolerate a higher yen. Fujii has said he doesn’t support a “weak yen” and questioned “the idea of easy intervention.”
Strengthening Yen
Speaking at a forum co-hosted by Bloomberg in Tokyo yesterday, Fujii said that he “never said I will leave the yen to strengthen” and that he didn’t necessarily accept gains in the currency.
Gyohten said currency policy shouldn’t be defined by whether the government will step into the currency market.
“No one can say they’ll definitely intervene in the market or that they definitely won’t,” Gyohten said. “We’d should be careful about labeling or defining currency policy in such a way.”
