[A-List] Treasury yields shake off Koizumi comments

["Sabri Oncu" <soncu@xxxxxxxxxxx>]

Treasury yields shake off Koizumi comments

By David Pilling in Tokyo and Song Jung-a in Hong Kong 
Financial Times Published: March 10 2005 20:07 

Japan's finance ministry moved swiftly to calm markets on Thursday after the
dollar tumbled and Treasury yields climbed on comments made by Junichiro
Koizumi, prime minister, about diversification of the country's foreign
currency reserves.

Asked by a parliamentary committee about government policy on Japan's
$840.6bn of foreign reserves, Mr Koizumi said: "I believe diversification is
necessary." Markets reacted sharply to his comments, sending the euro to a
two-month high of $1.3456 against the dollar.

Ten-year Treasury yields reached a seven-month high at 4.57 per cent on the
news. Japan holds massive amounts of Treasuries as a result of its currency
interventions and any diversification of its reserves is likely to involve
scaling back its holdings.

Investors fear this would weaken bond prices and lift yields, raising US
borrowing costs. Peter McTeague, strategist at RBS Greenwich Capital, said
trading volumes of US Treasuries jumped and investors suffered a "wild ride"
in Asian trading hours.

Japan's finance ministry moved quickly to quash any suggestion that policy
had changed.

Mastatsugu Asakawa, director of the foreign exchange division at the
ministry, denied Japan's policy had shifted. "We have never thought about
currency diversification," he said, adding that Mr Koizumi was referring to
asset-class diversification within a particular currency.

"The prime minister's response was very clear. He did not say anything about
his intention to diversify our foreign reserves in terms of currency," said
Mr Asakawa. "He said something in general that, from a risk management
perspective, obviously diversification is needed."

However, the episode emphasised market sensitivity to any hint that Asian
central banks were considering diversifying their massive dollar holdings,
which have built up after unprecedented levels of intervention. Last month,
currency markets were sent into a spin and Treasury yields rose after
officials in South Korea suggested it might be contemplating a more
diversified foreign currency strategy. On Thursday, Park Seung, governor of
South Korea's central bank, underlined Seoul's concern about dollar weakness
when he called for international action to counter a sharp appreciation of
the won.

Although the market remains sceptical of imminent Japanese diversification,
Tony Norfield, global head of foreign exchange strategy at ABN Amro, said
any debate in Japan about its reserves would "put the spotlight on the
dollar".