SUNS 4351 Tuesday 12 January 1999

Tokyo, Jan 8 (IPS/Suvendrini Kakuchi) - Tired of constant criticism from the United States, Japan is cozying up to Europe in a bid to create a bigger role for itself in efforts to redefine the world's
financial system.

But while Japan thinks along the same lines as European leaders on the need for financial reforms -- and for lesser reliance on the U.S. dollar as an international currency -- the emergence of the euro might well clash with Tokyo's recent calls for the "internationalisation" of the yen.

Analysts say this month's launch of the euro has actually created a new challenge for Japan, already battling odds to keep up the international profile of its currency.

The yen has suffered setbacks against a backdrop of a long economic slowdown and given some 700 billion dollars in bad loans saddling Japanese banks, which affects confidence in the economy.

Now, the government fears that the euro will take away more of the yen's flagging glory. Analysts point out that the euro has now begun to be used by 11 European member nations with a gross domestic product of about 6.5 trillion dollars -- a figure that ranks with the U.S.

"The yen will lose part of its share of international transactions to the euro. This would in turn dim the chances of the yen becoming a key currency -- after the dollar and the euro -- and the yen's role would decline," warned the Yomuiri Shinbun, Japan's largest daily, in a recent editorial.

The U.S. dollar has 42 percent of the foreign exchange turnover compared to 12 percent for the Japanese yen. The German mark, which leads the euro, holds 18 percent.

Yet both Japan and European countries agree that the time is ripe for a financial system that is not overly dependent on the U.S. dollar, a situation that makes economies susceptible to harmful fluctuations.

In a joint statement Thursday, Japanese Prime Minister Keizo Obuchi and French President Jacques Chirac called for a new system of cooperation in the foreign exchange market given the euro's debut.

On the eve of his departure, Obuchi told reporters he will work toward the establishment of a tripolar international monetary system, led by the U.S. dollar, the euro and the Japanese yen.

Ken Landon, a currency expert at Deutsche Securities, says Obuchi has earned support for this proposal because of similarities in mindset with the Europeans.

Both Japan and Europe want stable exchange rates and Europeans are against too much strengthening of the euro, which Landon says differs with the United States that pushes exchange rates onto the market. In December, Japanese Finance Minister Kiichi Miyazawa called for reforms that include an exchange-rate regime that would bring "greater stability on the one hand and needed flexibility on the other, among the yen, the U.S. dollar and the euro". Earlier, German finance minister Oskar Lafontaine called for a managed exchange-rate regime.

The world economy is watching how the euro fares, after a week of trading. As for the yen, analysts say Japan has to try a lot harder to emerge as a winner.

"The yen is the most volatile international currency compared to the dollar and German mark," Landon pointed out. "This is because of government policies that do not indicate stability. The yen will remain a respected currency only if the government can prove it is ready to
deregulate faster and move its economy again."

The Japanese government is resorting to short-term moves to prop up the yen.

For instance the recent climb of the yen against the U.S. dollar -- reaching 110 yen to the dollar from 121 yen -- follows comments by vice minister for international affairs Eisuke Sakakibara, known as "Mr Yen", who said the dollar's weakness stems from the "bubble-like" U.S. economy.

"In short," comments economist Hiromasa Kubo at Kobe University, "by making the yen stronger, the government hopes its appeal will last longer. But that's not a very good move because a strong yen will hurt Japan's export industry which has been the only thing propping up the Japanese economy." A strong euro could also hurt Japan's position as the leading economic player in Asia, experts say.

Despite being the largest investor and aid donor to the region, Japan has conducted much of its business with Asia in U.S. dollars since Asian currencies are pegged to the greenback.

But if countries like China, which Japan views as a rival, makes more use of the euro, some Japanese officials fear that this would not augur well for making the yen a major trading currency in the region.

At present, 13% of China's total exports go to Europe. Like many other Asian countries, China has also said it plans to add the euro to its currency reserves to diversify its basket of currencies and reduce dependence on the U.S. dollar. Beijing's moves would be significant, since its foreign exchange reserves are estimated at 141 dollars.

At the root of these fears are a wariness by Japan about Beijing, especially since it is in recession while European leaders have been flocking to China.

Still, Japan -- tired of being lambasted by the U.S. on trade policies, its recession and for not doing enough amid the Asian crisis -- should perhaps be glad that there is emerging a potential alternative to the U.S. dollar.

All told, analysts say the euro has allowed Japan itself to move away from its heavy dependence on the U.S. In the weeks leading up to the euro's launch, Japan had begun selling dollars and loading up on European currencies.

"Japanese investors will have another alternative in the foreign currency market," explained Landon. "While the Japanese have invested heavily in the U.S., a strong euro could provide a shift and also hurt the U.S. economy."