Shinohara Says U.S. Must Cut Deficits to Help Dollar

By Keiko Ujikane

Nov. 19 (Bloomberg) -- Japan's top currency official said the U.S. should work to reduce its deficits to ensure the world's reserve currency remains strong.

``We want the key currency to be stable. We want the key currency to be strong,'' Naoyuki Shinohara vice finance minister for international affairs, said at a conference in Sydney today. ``We do not want the key-currency country to continue running huge current-account deficits. We do not want the key-currency country to keep borrowing large amounts of money from abroad.''

Japan is defending the dollar in response to suggestions by French President Nicolas Sarkozy that there are alternatives. The U.S. currency fell to a 13-year low against the yen last month, reducing the value of Japan's U.S. government debt holdings and threatening exporters' earnings.

``Japan wants to avoid the yen's appreciation,'' which would hurt exporters and stocks, said Tomoko Fujii, head of economics and strategy at Bank of America in Tokyo. Japan's investment of its foreign reserves in U.S. debt is another reason, Fujii said.

``Fortunately or unfortunately, there's no other currency that can replace the U.S. dollar at least for the foreseeable future,'' Shinohara said, adding that ``global efforts'' are required to ensure the ``sustainability'' of the reserve system.

Japanese Prime Minister Taro Aso said at last weekend's Group of 20 leadership summit in Washington that ``we need to support the dollar-centered currency system,'' while Sarkozy asked whether the euro or China's yuan should be discussed.

Root Causes

Japan held $573.2 billion of U.S. Treasuries in September, second only to China, the U.S. Treasury said yesterday.

Reducing U.S. deficits would also help to alleviate the lopsided trade flows that are one of the ``root causes of the current financial market turmoil,'' Shinohara said.

The U.S. needs to attract $2 billion a day from abroad to fund the deficit in its current account, the broadest measure of trade. The gap was the widest in a year in the second quarter.

Shinohara also said he was surprised at the scale of the yen carry trade's unwinding since the financial crisis began in August 2007 and intensified following the collapse of Lehman Brothers Holdings Inc. two months ago.

``The size of carry trades was larger than we had expected,'' he said. ``The unwinding of carry trades was naturally larger'' and longer in duration than he anticipated.

Yen's Gains

Investors' retreat from the trades, in which they get funds cheaply in one country to buy assets where returns are higher, has caused the yen to strengthen against all 15 other major currencies this year.

The Japanese currency surged 36 percent against Australia's dollar since the end of September as investors sold Australian assets they had bought using money borrowed in yen. Japan's 0.3 percent key interest rate is the lowest in the industrialized world, and compares with Australia's 5.25 percent.

The yen has also gained 9.9 percent against the U.S. dollar this quarter and 23 percent versus the euro. It rose to 96.58 per U.S. dollar at 3:14 p.m. in Tokyo from 97.03 late yesterday.

The Australian dollar fell to 62.25 yen from 63.30 as the deepening global economic slump spurred Asian stock losses.

To contact the reporter on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net