Japan's sticking with the U.S. dollar, for now

Japan's new finance minister, Yasutake Tango, told financial newspapers that Japan will keep buying U.S. Treasuries and supporting the dollar's status, according to reports in both The Wall Street Journal and Bloomberg.

The tune could change though if Masaharu Nakagawa, the shadow finance minister in the Democratic Party of Japan (DPJ), wins in the August elections. The Democratic Party leads in the polls.

China, India, Brazil, Mexico and South Africa all support a move away from the dollar as the primary denomination in world reserves. China, with the largest dollar reserves, signaled it was concerned that China's dollar assets could decline as the U.S. sells record amounts of debt to fund stimulus spending. Russia had supported a move away from the dollar, but toned down the rhetoric in mid-June and indicated continuing support for the dollar.

Japan, which holds the second largest chunk of U.S. securities ($685.9 billion in April), doesn't believe that weakening the dollar by choosing another world currency would be a good move for Japan. It would strengthen the yen against the dollar and make its exports more expensive and less attractive. This could hurt Japan's weak economic recovery and slow its growth.

"Maintaining trust in the dollar is important to the stability of the global financial system and the recovery of the world economy," Tango said in his group interview with financial newspapers. He went on to say, "The U.S. is saying it is pursuing the so-called 'strong dollar policy,' so we're expecting" Washington to follow through on this policy.

Some believe Tango will need to change his tune if the DPJ wins the Lower House elections to be held on August 30. Nakagawa wants Japan to start buying other reserve currencies, such as IMF bonds that pay interest pegged to the dollar, yen, euro and pound. Tango hasn't signaled whether he will consider IMF bonds.

Japan is facing its own economic crisis. Japan's public debt, the world's largest, will approach 200 percent of GDP in 2010, according to the Organization for Economic Cooperation and Development. Its tax receipts were down in December and the ministry plans to sell a record 44.1 trillion yen of new bonds.

Lita Epstein has written 25 books including The Complete Idiot's Guide to Foreign Currency Trading.


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