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Will Japan Take a Samurai to the U.S. Dollar?

Posted by Larry Doyle on July 13, 2009 11:51 AM |

Is the economic influence of the BRIC nations (Brazil, Russia, India, and China) gaining momentum and a huge ally in the assault on the U.S. dollar? It would appear so. What country is also questioning the validity of the greenback as the international reserve currency? Our second largest creditor, that being Japan.

Bloomberg highlights, DPJ’s Nakagawa Says Japan Should Diversify Reserves:

Japan’s opposition party, leading in polls ahead of next month’s election, said the nation should consider shifting its $1 trillion of foreign reserves away from the dollar and buying International Monetary Fund bonds.

“In the medium to long term, we need to do what we can to avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing,” Masaharu Nakagawa, the shadow finance minister in the Democratic Party of Japan, said in an interview in Tokyo on July 9. “Many countries are starting to diversify their reserves.”

When nations that are not exactly strong allies call for a change in the sovereignty of our U.S. dollar as the international reserve currency, that is one thing. When leaders of leading political parties within nations closely allied with the United States do the same, that is an entirely different issue.

Clearly, Nakagawa sees the shift in momentum away from the dollar and is looking to curry favor with the BRIC nations. However, make no mistake, current holders of U.S. dollars and dollar denominated assets face a real predicament if the dollar weakens. How do these nations diversify their holdings while protecting their existing dollar positions?

1. They would have to sell dollars or dollar denominated assets which would depress the value of their remaining positions. Not exactly an appealing proposition.

2. They would have to stop purchasing or significantly cut back their purchases of dollars and dollar denominated assets. This maneuver would also depress the value of their positions and is also unappealing.

Is there a third means for these nations to gain diversity? It would not necessarily seem so. However, Japan’s Nakagawa believes there is another means. Bloomberg highlights:

Nakagawa, 59, said Japan’s government should ask the U.S. to sell debt denominated in yen, so-called samurai bonds, as a way to diversify reserves and promote the globalization of the yen.

Wow!! Are we turning Japanese?

While some in our country may dismiss the prospect of the U.S issuing samurai bonds as a non-starter, I would not be so quick to dismiss the potential of this happening. Why? Our deficit is big and getting bigger. As such, we may find ourselves in a position where “beggars can’t be choosers.”

Additionally, I view the change in the definition of direct bidders in our Treasury auction process as a real sign of concern by the U.S. Treasury that foreign buyers will lessen their support for our debt. I wrote about this a few weeks back in “Turbo-Tim Takes ‘Indirect’ to a Whole New Level.”

Also, we witness Geithner playing an increasing amount of defense about U. S. economic policy and the implications it has on our currency. Having been laughed at by Chinese students on this issue a month or so ago (“Chinese Laugh at Geithner”), Geithner is now headed to the Middle East to defend our positions over there.

Will we issue debt in Saudi Riyals as well?


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