Turmoil in the Currency Markets: Tokyo Shows Diminishing Loyalty to the Dollar and George Bush’s Cattlemen Friends


George Soros must be getting ready for some incredible windfalls. Korea, Russia, and now Japan have discussed diversifying their foreign reserves portfolios and essentially offsetting their heavy dollar dependency with other currencies.
Shockwaves. Some of us have been saying that this would happen — and have held the position ever since the current account deficit began to skyrocket from it’s long term average of roughly 2% to 6% of GDP.
This in from Reuters:
Prime Minister Junichiro Koizumi said Thursday that diversification of Japan’s foreign-exchange reserves was “necessary,” rekindling speculation in the currency market that the government could shift its reserves, the world’s largest, out of dollars.
The dollar quickly recovered when the Ministry of Finance said Tokyo had no plans to shift funds out of the dollar, but the episode underscored the market’s wariness over Japan’s policy toward its $840.6 billion in reserves.
The latest gyration came after a similar downward spike in the dollar last month after a central bank report in South Korea, which has the world’s fourth-largest foreign-exchange reserves, referred to possible diversification.
When asked about the risks of having reserves too concentrated in one currency, Koizumi told a parliamentary committee, “I believe diversification is necessary.”

What Japan is doing is diversifying its political portfolio.
Let’s review the latest dynamics in Japan’s policy positions and whether they represent a net negative or net positive for George Bush, who spends a lot of time mentioning Koizumi in his press conferences.
1. (+) Japan extends term of service for its approximately 600 non-combat Self-Defense Forces stationed in Iraq (and Australia commits 450 new troops to protect the Japanese since the Dutch have pulled out).
2. (-) Japan pursues UN Security Council Seat and for the Europeans and others in the mix, regularly underscores the importance of the United Nations.
3. (-) China replaces the United States as Japan’s largest trading partner.
4. (+) America gets Japan to publicly declare what has been privately understood for years — that Taiwan’s security is Japan’s concern as well and is explicitly mentioned in the last revision of the U.S.-Japan Joint Defense Guidelines.
5. (-) Japan fails to show up on September 9, 2004 at treasury bill auction. Still uncertain as to whether someone overslept, got the date wrong, or whether this was a subtle political signal.
6. (-) George Bush discovers this week that he has been misled by Koizumi on re-opening Japan’s markets to American beef after the last Mad Cow disease scare. Whereas Koizumi once said that this was a done deal, he is now saying he is working on it with no date for resumption yet in place.
For the first few years after 9/11, the policy positions between Japan and the United States on every front were identical — so close in fact that Japan seemed to blend into U.S. policy so closely that Japan didn’t seem to matter anymore. It largely disappeared as a force in D.C. — whereas Europe whose portfolio of confrontation and collaboration with the U.S., depending on the issue, saw its stock and presence rising.
Although Japan Ambassador to the U.S. Ryozo Kato would regularly state that Japan-U.S. relations had never been better than during the last few years — the truth is Japan-U.S. relations have never been more thin or fragile. Koizumi positioned Japan as America’s lap dog since September 2001 and Kato and Japan’s Foreign Ministry have opted for a low-visibility, below-the-radar-screen type of interaction with administration officials where Richard Armitage, Michael Green, and Jim Kelly orchestrated U.S.-Japan deals with a few gatekeeper Japanese officials. Simple. Uncomplicated. But anything but robust.
Today, it seems Koizumi is realizing he has leverage with America because of his loyalty and the deployment of troops in Iraq. And he is also realizing that he is “over-bought” in his America-only portfolio.
He is now diversifying — and it is fascinating to observe.
Watch out….Japan is coming back as a force with which to reckon.
— Steve Clemons