DAVOS-Yen better reflects fundamentals after rating cut-ADB

By Natsuko Waki
DAVOS, Switzerland | Fri Jan 28, 2011 2:22am EST
DAVOS, Switzerland Jan 28 (Reuters) - The decline in the
yen following Japan's credit rating downgrade is helping adjust
the currency towards its fundamentals, Asian Development Bank
President Haruhiko Kuroda said.

The yen hit two-month lows against the euro and two-week
troughs versus the dollar on Thursday after Standard & Poor's
cut Japan's rating for the first time since 2002, saying Tokyo
had no plan to deal with its mounting debt.

Between 2007 and 2010, the yen has risen more than 50
percent against the dollar JPY=. It hit a 15-year high near 80
per dollar in October, despite Japan's yen-selling intervention
the month before.

"After the downgrade, bond prices did not move very much.
But the yen did weaken. The yen was overvalued, having risen too
much since 2008 against all currencies in the world," Kuroda
told Reuters in an interview late on Thursday.

"So the yen adjusted lower -- it's better reflecting
fundamentals," added Kuroda, who is former vice finance minister
for international affairs at Japan's Finance Ministry.
Standard & Poor's cut Japan's long-term sovereign debt
rating by a notch on Thursday to AA-minus, its fourth highest
rating. It said an ageing population, persistent deflation and
the government's loss of its upper house majority compounded the
fiscal challenge.

Politicians and ratings agencies have warned for years that
Japan must cut its public debt, which is double the size of its
$5 trillion economy -- by far the worst among rich nations.

Food inflation is at the top of the agenda for many
policymakers, including Kuroda, with memories still fresh of the
2008 food crisis when soaring prices sparked riots in several
countries, high inflation and in several cases deep trade

Earlier this month, the UN's Food and Agriculture
Organisation said global food prices reached their highest
levels since its records began in 1990 and that grains prices
could climb further as adverse weather patterns give cause for

Kuroda said food prices were yet to pose serious risks for
Asia as rice prices remained under control, but robust growth in
emerging economies underpinned real demand for food.
"Inflation outside of China is more serious -- Pakistan,
India, or Indonesia. But inflation is the biggest task for
China," Kuroda said.

"If China let the yuan appreciate more, that will help
control imported inflation. There's more room for that. It's a
plus for China's economy."

Many Asian currencies with inflationary problems face a
policy dilemma: higher interest rates will attract capital
inflows, exacerbate asset bubbles. However, unless authorities
act, inflation could get out of control.

"It's a typical policy dilemma. Instead of raising interest
rates, bank reserve requirements is one way to tighten
liquidity," Kuroda said.
He added Japan experienced a similar issue in the 1950-60s
when real growth rate was 10 percent and inflation rate was 5
percent, while the exchange rate was fixed at 360 yen to the
dollar. However, back then, the country ran a current account
deficit. (Editing by Mike Nesbit)
Source: Reuters.Com