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Business - Reuters
Greenspan Warns on Asian Bank Buying
Reuters
1 hour, 39 minutes ago
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By Victoria Thieberger

NEW YORK (Reuters) - Federal Reserve (news - web sites) Chairman Alan Greenspan (news - web sites) on Tuesday issued his strongest warning yet about Asian central bank purchases of U.S. assets, saying it could raise problems for the economies of China and Japan.

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He said "extraordinary" Asian central bank buying of dollar assets had totaled almost $240 billion since the start of 2002, describing the size of Japan's purchases as "awesome."

The central banks of China and Japan have been heavy buyers of U.S. assets to park the proceeds from selling their own currencies to try to prevent them from rising against the dollar and so hurting their exports.

"The current performance of the Japanese economy suggests that we are getting closer to the point where continued intervention at the present scale will no longer meet the monetary policy needs of Japan," Greenspan told the Economic Club of New York.

Japan's top government spokesman, Yasuo Fukuda, said in Tokyo later that he did not regard the Fed chief's comments as criticism and that Tokyo would continue to act appropriately when there were sharp exchange-rate swings.

To finance this intervention, the central banks are essentially printing money which then floods their domestic economies, threatening inflation, Greenspan suggested.

Japanese monetary authorities bought almost $100 billion in January and February in their efforts to prevent the yen from rising rapidly and damaging the nation's export-led recovery.

Much of the money has found its way into U.S. Treasuries, and is widely thought to be supporting the U.S. bond market and keeping yields lower than they would otherwise be.

Analysts said that if the central banks did slow or stop their buying, this could push U.S. rates higher and lift borrowing costs for U.S. businesses and consumers.

As for China, Greenspan warned that the Chinese central bank's large purchases of U.S. dollars to keep the yuan in a close band pegged to the dollar could threaten an "overheating of the Chinese economy."

TOKYO RECKONING NEAR

Greenspan has referred to Asian central bank buying in other appearances over the past month, but his comments about Japan seemed unusually explicit.

The Fed chief said it seemed likely that Tokyo's rate of accumulation of dollar assets "will have to slow at some point and eventually cease" once the current situation of declining prices, or deflation, is past.

"He told the market something a little bit new, that Japan's getting closer to the point where intervention would not fit with the monetary policy goals of the country," said Alan Ruskin, research director at 4Cast Ltd.

The Fed chief acknowledged concerns that less buying of U.S. Treasury securities could put upward pressure on U.S. interest rates but played down those fears.

"While there are obvious reasons to be concerned about such an outcome, the effect of a reduction in the scale of intervention, or even net sales, on U.S. financial markets would likely be small," Greenspan said.

That is a view that some in the Treasury market dispute, because of the scale of foreign central bank buying.

 

Greenspan also played down worries that a narrowing of the yawning U.S. current account deficit would result in a crisis for markets, saying the declining dollar would help curb the trade gap over time.

"The currency depreciation that we have experienced of late should eventually help to contain our current account deficit as foreign producers export less to the United States," he said.

He noted foreigners' claims on the United States represented by the U.S. current account imbalance have grown markedly and that it was hard to say when that will slow or even reverse, "but it is evident that the greater the degree of international flexibility, the less risk of a crisis."

LOW FOR A REASON

Asked about U.S. interest rates, Greenspan repeated that the federal funds rate, now at a 1958 low of 1 percent, had been kept low for "very good reasons" but must rise eventually.

"The Federal Funds rate is accommodative and at some point it will have to rise back to a more neutral state, because it is inconsistent with general long-term stability," he said.

Greenspan was asked about the U.S. central bank's performance during the 1990s -- a period for which it has been retroactively blamed because it did not push interest rates up enough to curb a stock-market bubble that eventually burst.

The Fed chief seemed to back away a little from his previous defense of the Fed's actions, saying he has concluded "tentatively" the Fed did the right thing but it might be five or 10 years before the answer was known, (Additional reporting by Glenn Somerville)


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