Global Briefing: Summers' Remarks Backstop the Buck

The dollar's correction came to an early end after Treasury's Summers called for the Japanese government and Bank of Japan to do more to resuscitate Japan's ailing economy. The downside move in the dollar had appeared to begin in earnest yesterday. Nevertheless, the dollar's bull move has not resumed and the risk is for choppy trading with a slight downside bias ahead of the weekend.

Summers suggested, in a way that only a senior U.S. official can, that Japan ought to further ease monetary policy. The Treasury aide cautioned against pursuing a weak-yen policy, but surely he, an eminent economist, recognizes that a weaker yen would likely be the consequence of the BOJ easing monetary policy further. This is especially true in the context of heightened fears that the Federal Reserve may contemplate rescinding at least one of the 25-basis-point rate cuts delivered in the midst of the credit crisis last fall. Summer's comments helped reverse the early weakness in the Japanese bond market, and the benchmark bond yield slipped 4 basis points to 1.885%.

In one of the few bright spots in the slew of economic data published by Japan today, January industrial production posted a 0.8% increase. This was at the upper end of market expectations, but below the 1% gain forecast by MITI. MITI now forecasts a 0.7% increase in February and a 0.4% rise in March.

Japan continues to work off its inventory overhang problem. Inventories fell 1.7% in January, marking the ninth consecutive monthly decline. The inventory-to-shipments ratio fell 2.9 points to 104.3. When this ratio falls closer to 100, many market observers expect a more sustained recovery in output. This said, the inventory problem in part reflects excess capacity, which MITI has acknowledged it is looking at ways to reduce. Other economic data were not as favorable. Construction spending and housing starts continued to fall and by more than many expected. ...