Yen for dollar among Asians worries experts

Interest rate rise feared if Japan, China, S. Korea cool on buying U.S. debt

April 25, 2004|By Tyler Marshall | Tyler Marshall,LOS ANGELES TIMES

HONG KONG - A large buildup of U.S. dollars held by Japan, China and other Asian countries is fueling increasing unease among analysts and policy-makers, who fear it now poses risks to the U.S. economic recovery and global financial stability.

Asian countries hold foreign exchange reserves - mostly in dollars - valued at more than $2 trillion, nearly triple the amount of seven years ago, according to the Asian Development Bank. The dollar reserves continue to grow rapidly. Japan and China are particularly heavy buyers.

Asian governments buy dollars because it helps boost their export-led economies. Snapping them up keeps the greenback's value high and the value of regional currencies low, giving Asian countries a vital competitive edge in foreign markets.

Though this strategy makes a Chinese-made toy or a Japanese television set cheaper for Americans and other global consumers, it has serious side effects. The dollars that Asian countries rake in as payments for those exports further boost their bloated reserves while the record U.S. trade deficit grows.

Asia's dollar purchases also effectively finance the huge and growing U.S. budget deficit as central bankers in the region invest most of their dollars in U.S. Treasury bonds and other securities. They have done this with such gusto that Uncle Sam doesn't have to offer higher rates to move the average $1.5 billion in Treasury securities it must sell each day to sustain the current year's deficit.

Without that demand, the United States would have to offer higher interest rates to lure buyers, a move that would drive up rates on mortgages, business loans and more.

That, experts say, is the danger.

Any significant decline in Asia's seemingly insatiable appetite for the dollar would trigger a rise in interest rates that could slow U.S. growth and depress a job market only now showing signs of recovery.

"Right now, it is Asians who are helping keep U.S. interest rates low," said Kenneth Courtis, Asia vice chairman of the investment company Goldman, Sachs & Co.

The connection between Asia's central bank policies and U.S. economic well-being stands as a startling - and, for some, unsettling - example of how globalization has closely intertwined the fates of people living oceans apart.

Asia's "dollar habit" also poses other risks to Americans, experts say. By allowing the United States to pile up record deficits without having to pay the usual price of higher interest rates, Asia has effectively encouraged Congress and the Bush administration to amass more debt.

If U.S. budget deficits continue to grow unchecked, they could, among other things, endanger the government's ability to finance Medicare and Social Security programs once baby boomers begin retiring.

Though few economists think it will go that far, they agree that bigger deficits could lead to tougher and more painful adjustments for Americans.

Lately, hints have emerged that Asian governments might be reviewing their positions. Foreign currency traders report that the frenetic pace of Japan's dollar buying during the initial months of this year has eased noticeably during the last couple of weeks. And there are signs that some countries have begun to divert investments into their domestic economies. But these movements remain small.

The Los Angeles Times is a Tribune Publishing newspaper. Researcher Hisako Ueno in the Times' Tokyo bureau contributed to this article.

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