Known as Mr. Yen, Eisuke Sakakibara, a professor at Keio University and former vice finance minister for international affairs, believes that as long as the market sees that the United States is relying on a dollar-weakening policy to reduce its huge deficit, the gradual weakening of the greenback will be inevitable.

In an interview with Asahi Shimbun senior staff writer Manabu Hara, Sakakibara said he thought the yen's rate against the dollar would climb to the 90-95 range within the next three to six months.

Q: The dollar has continued to weaken gradually on the currency market. What's the market's view of the dollar?

A: The major cause of the weakening dollar not only vis-a-vis the yen but also against other currencies stems from the U.S.'s huge twin deficits.

The U.S. deficit has accumulated under the current Bush administration, but the market now sees that the perception of Americans, including government authorities, business executives and economists, is that a weakening dollar is the only way to reduce the current account deficit in a relatively short period of time.

I don't know whether such a view is justified or not, but as long as that's their prevailing view, the dollar will inevitably weaken. I think that over the next three to six months the yen will rise to the range of 90 to 95 yen. The euro will rise to 1.40 to the dollar within the same period.

Q: Does the re-election of President George W. Bush have anything to do with the weakening of the dollar?

A: Under the Bush administration, people anticipated that the government deficit would not be reduced substantially although the president said he was committed to cutting it in half in the next four years. But many think this pledge is not credible because the Bush administration is unlikely to increase taxes or to cut spending. His pledge has even less credibility than Sen. John Kerry's.

In this regard, Bush's re-election has some effect in further weakening the dollar, but it is not the sole and major reason. I am not sure if the weakening-dollar policy will be successful in reducing the U.S. deficit. Exchange rate changes don't necessarily reduce or increase trade deficits or surpluses. The 1985 Plaza agreement, under which the industrialized democracies agreed to intervene in a concerted fashion to rectify the strong dollar, could not cut Japan's huge surplus and the U.S.'s huge deficit.

Q: Until spring, the Japanese government had aggressively intervened in the currency market to prevent the yen from strengthening against the dollar. But now there is no such market intervention. Why is that?

A: There are many reasons why it is difficult for the government to keep up that kind of market intervention strategy.

First, there is resistance from Europe and possibly from the United States as well. Washington had repeatedly said that although it supports a strong-dollar policy, the exchange rate should be decided by market forces.

Other aspects making it difficult for Tokyo to massively intervene in the market is the huge liability of Japan's foreign reserves, which have reached more than $850 billion. Tokyo issued financial bills to fund its market intervention and the outstanding amount is now close to $1 trillion. Because this is such an enormous amount already, it's difficult to add to. The government can increase it by a small amount, but it would be extremely difficult to expand the outstanding amount of financial bills very much.

I think that the negative effect of the weakening dollar on the current Japanese economy is not as serious as many people think. This is because many Japanese export-oriented companies are quite balanced in terms of export and import.

The situation for many companies is quite different now than 10 to 20 years ago. Most of the major Japanese firms are multinational and their trade has been diversified. They are major exporters as well as big importers. The Japanese companies can easily tolerate an exchange rate between 90 to 95 yen.

Q: It's rumored that China and Russia have been converting their holdings of dollars into euros. What do you think of this allegation? Do you think that Japan should follow suit?

A: I know that there has been a persistent rumor in the market that Asian and Russian central banks have been increasing the ratio of euros in their foreign reserve portfolio. There is no confirmation of that, but I think that those rumors are at least partially true.

Japan cannot do the same because its dollar-based foreign reserves are too huge. If Tokyo attempts to do so, the action would trigger a rapid decline of the dollar. The Japanese governmnet would be seriously hurt by the subsequent currency evaluation loss arising from the dollar's decline.

The Japanese position is like that of a big bank that lends a huge amount of money to borrowers. It cannot withdraw money easily. It's very hard for a country like Japan to change its foreign reserve portfolio. If Japan starts to change dollars into other currencies, it would deal a serious blow to the world economy.

Q: Do you think that the current weakening of the dollar will lead Beijing to revalue the renminbi or the yuan against the dollar?

A: I don't think so. In my view, the Chinese government will not revalue the renminbi for another two years or so, although it will eventually do so.

The idea that China has a fixed-rate system pegged to the dollar is a misperception. China's system is what they call a crawling peg system. They can revalue the currency with the present system but in practice they are carrying out a policy of fixing the rate with the dollar.

In two to three years, Beijing will start making the exchange rate system more flexible, including revaluing the renminbi against the dollar.

But it takes time for China to do so because it has serious problems to be addressed such as nonperforming loans, which are saddling financial institutions. It needs to fix the banking sector first before deregulating foreign exchange control.

Its domestic bond market is also not fully prepared for the emergence of a deregulated forex market. In fact, the government recently infused $40 billion into two major banks and has been consolidating the domestic securities market and so on.

So, Beijing has been laying the institutional groundwork for a flexible currency system to be adopted within the next seveal years.(IHT/Asahi: December 11,2004)