TOKYO: A top Japanese Government adviser warned yesterday that the impact of a strong yen on the Japanese economy could have significant global implications, a view which is shared by other Group of Seven industrial countries

Haruhiko Kuroda, special adviser to Prime Minister Junichiro Koizumi's cabinet, told reporters that he expected Japan to reiterate its concerns about the yen's rise when G7 finance ministers meet in Florida later in the week.

"It is truly amazing, in terms of both scale and speed, how the United States is propelling the global economy. Japan is almost half as big and it would be bad for the global economy if it were to slip back into recession and deflation worsened because of a higher yen," he said. "There is no difference of opinion on this (in the G7)," said Kuroda, who as vice-finance minister for international affairs until a year ago served as a "sherpa" to prepare G7 meetings. "I don't think the United States wants the dollar to fall further, given it has already fallen more than 10 per cent since September and even more over the last two years," he added.

The dollar fell to around 105.20 yen on Tuesday, its lowest in nearly three-and-a-half years. It also hit record lows against the euro last month, skidding towards US$1.29 to the single currency before clawing back up slightly. To beat back the buoyant yen, Japan spent more than 20 trillion yen (US$190 billion) last year in currency intervention and a further 7 trillion yen (US$66 billion) last month.

Asked why Japan had to intervene so heavily, Kuroda said it was not so much the concern that exports would shrink but the likely impact on deflation and corporate earnings, given corporate capital spending was now a main driver of growth.

"For Japan, the big task is to prevent a vicious spiral of deflation and a higher yen," he said.

Japan's core consumer price index rose from year-ago levels for the first time in five-and-a-half years in October, but economists say that was due to one-off factors and that deflationary pressures persisted.

A higher yen weighs on prices initially by depressing import prices. Deflation in turn raises real interest rates - nominal rates minus the rate of inflation - and can strengthen the yen. Falling prices also make existing debt more expensive to pay back and thus dampen business investment.

On the whole, Kuroda said, the global economy had steadily improved since last year and the G7 finance ministers and central bank chiefs were likely to confirm such an assessment at the Boca Raton meeting tomorrow and Saturday.

But Kuroda said there was no way of knowing what the G7 would say in its communique on currencies, declining to speculate on whether the Group would drop a controversial wording in its previous statement about greater exchange rate "flexibility."

That language, introduced at the previous G7 meeting in Dubai in September, accelerated the rise in the euro and the yen, even though Japanese officials say it was referring to the more rigid currency regimes of China and other emerging Asian currencies. "Whatever the G7D (deputy finance ministers from the G7) discussed, they have no control over what the ministers might agree on," Kuroda said.

Kuroda said he expected the dollar to bottom out and turn higher by mid-year.

"I think the dollar will reverse course at least by summer," he said, adding that in addition to the policymakers' desire for more stable exchange rates, financial market operators were too short in dollars and long in euros and yen.

Considering the high economic growth, productivity gains and rate of return on investment in the United States relative to Japan and Europe, investors had to return to the dollar over time, he said.

(China Daily 02/05/2004 page12)