Sakakibara Says a Strong Yen Is in Japan's National Interest

By Patricia Lui and Susan Li

Nov. 7 (Bloomberg) -- Japan will benefit from a strong yen because it will hold down prices for raw materials, said Eisuke Sakakibara, formerly Japan's top currency official.

``I still believe a strong yen is in the national interest of Japan, particularly in this situation when raw material prices will increase,'' Sakakibara said in an interview with Bloomberg Television in Singapore yesterday. The yen may rise to as high as 80 per dollar as so-called carry trades unwind, said Sakakibara, who was dubbed ``Mr. Yen'' during his 1997-1999 tenure at the Finance Ministry because of his influence over currency markets.

The yen's 15 percent gain against the dollar this year and 33 percent advance versus the euro prompted Japan's government to announce last month it may buy or sell currencies to influence exchange rates, as the world's second-largest economy stumbled. Gross domestic product shrank by an annualized 3 percent in the second quarter as exports dropped 2.5 percent, according to government data.

The yen traded at 97.30 per dollar at 8:55 a.m. in Tokyo from 97.75 late yesterday. It was quoted at 123.56 per euro from 124.29. Against the Australian dollar, the yen is 64.68 from 66.35. It was at 56.88 versus the New Zealand dollar from 58.53.

Japanese exporters are competitive even if the yen rises to between 80 and 85 per U.S. dollar, Sakakibara said.

``You have to differentiate between balance sheet and competitiveness,'' he said. ``On the balance sheet, a high yen will cut into their profits but as far as competitiveness is concerned, they are competing quite well with Ford or General Motors.''

Carry Trade Unwinding

The yen surged since August, as the global credit crunch tipped the world toward recession, shattering investor confidence and prompting money managers to pull out of carry trades.

In such trades, investors get funds in a country with low borrowing costs and invest in another with higher interest rates, earning the spread between the two. The risk is that currency market moves can erase those profits. The Bank of Japan's benchmark rate of 0.3 percent compares with 1 percent in the U.S., 3.25 percent in Europe, 5.25 percent in Australia and 6.5 percent in New Zealand.

``The unwinding of yen carry trade will probably continue and they will probably overshoot, and the yen going to 80 to the dollar is possible,'' Sakakibara said. ``We also must note that the Bank of Japan may intervene when it breaks 90. I don't know if it will be successful. It may be effective in the short term but in the longer term, we have to see.''

Rate Cuts

The Bank of Japan's decision last week to cut the benchmark policy rate by 20 basis points, or 0.2 percentage point, was surprising, Sakakibara said.

``Probably they didn't want to cut and the market was expecting 25 basis points,'' he said. ``So cutting by 20 basis points was probably due to resistance to market pressure and political pressure.''

The rate cut wasn't aimed at weakening the yen, he said, calling the reduction a ``symbolic move.''

Sakakibara also doubts the Bank of Japan or the U.S. Federal Reserve will reduce benchmark policy rates to zero.

``No chance,'' he said. ``Cutting interest rates by another 30 basis points doesn't matter. Zero interest rate policy is something no central bank wants to do as that implies that the short-term money market doesn't function.''

The Fed may cut its benchmark policy rate by a further 25 or 50 basis points at the most, he said.

Sakakibara, 67, currently a professor at Tokyo's Waseda University, is a member of the Asia-Pacific advisory board of Bloomberg LP, the parent of Bloomberg News.

To contact the reporter on this story: Patricia Lui at plui4@bloomberg.net