http://www.afr.com.au/content/990325/update/update53.html

FX Asia dollar at Y160? Some see Y2K as the trigger

The yen is holding up well in the face of Japan's recession, but some see another threat looming: the year 2000 computer glitch.

Speculation is growing in the currency markets that slow progress by Japan in resolving the problem will risk capital flight, putting the yen under downward pressure.

The Japanese Government, banks and many other areas of the private sector insist they're focusing on the problem and have recently accelerated efforts to deal with it.

But among some foreign companies and officials, the suspicion remains that Japan may be lagging far behind most other Group of Seven industrialised countries in preventing possible malfunctions of older computers, whose calendar systems could misread the year 2000 as 1900.

A US Senate committee, for example, issued earlier in March a report ranking Japan in the third of four tiers -- meaning Japan is nine to 24 months behind schedule in preparing for the bug. That readiness level is on a par with such countries as Turkey, Mexico and India.

"Since the banking sector has proved to be one of the most aggressive sectors in addressing the Y2K problem . . . underestimation on the part of the Japanese banking sector may indicate even less awareness in other sectors," the report warned.

Lack of resources at cash-strapped Japanese companies may be one obstacle to solving the problem. Some also cite a general lack of sophistication in information technology at many Japanese companies, compared to their US and European counterparts.

"Poor readiness in the financial and other sectors could prompt Japanese money to flee to well-prepared countries such as the US some time this year," says Yukihiko Hashimoto, assistant manager of foreign exchange trading at Sanwa Bank in Tokyo.

"Once capital-flight kicked in, the yen might plummet to Y160" against the dollar, he adds.

Signs of concern emerge in markets

Signs of concern over the problem are beginning to emerge in financial markets. The interest rate on euroyen December 1999 futures is around 0.48pc, almost double 0.26pc rate for September futures. By contrast, the rate for December eurodollar futures is 5.495pc, slightly up from 5.135pc for September futures.

"Although the gap is bigger for the US in absolute terms, the Japanese rates have almost doubled. The jump certainly reflects market concern about slow progress in Japan" on the year 2000 problem, says Yasunari Ueno, chief economist at Fuji Securities.

Bankers say publicly that the problem isn't affecting business ties. But behind the scenes there is talk that some Western banks may consider reducing exposures to Japanese companies if they drag their feet in addressing the issue.

"Japan is almost totally dependent on foreign countries for its energy. Procedures for importing oil and gas, for example, are nowadays managed by computers. If they malfunction and oil imports are disrupted, that would hamper economic activity in Japan," a Tokyo-based banker at a European bank told Dow Jones on condition of anonymity.

"It may be safer for our business to reduce those kinds of exposures."

Several banking industry sources, Japanese and foreign, said US and European banks had asked the Finance Ministry to slow down Japan's "Big Bang" deregulation to give local banks and brokerages more time to prepare for the computer problem. The ministry's response wasn't known.

Views on how much the problem could hurt the yen are divided. Some argue that the worries are overblown.

"Since around the end of last year, Japanese banks have intensified efforts to cope with the problem and we have almost solved the problem," says a bank officer in charge of the Year 2000 issue at a major Japanese city bank.

"The possibility of the yen falling as a result of Y2K is not high."

But the perception that Japan is slow in coping with problem remains strong among Westerners. US-based research company Gartner Group issued a report late last year warning that computers in Japan were likely to fail at a rate of 50pc, compared with 15pc in the US.

"Given the insufficiency in addressing the problem in all fields of the Japanese economy, this will increasingly become a negative factor for yen as the year 2000 approaches," says Shuji Takano, assistant manager of foreign exchange at ABN AMRO Bank.

"Vulnerability to the problem will be translated into less credibility for the yen in the currency markets."

"It is a fact that Japan has recently intensified efforts to get rid of the problem. But unless Japan also tries harder to advertise its efforts, downward pressure on the yen will at least continue for the rest of the year and next," says Sanwa Bank's Hashimoto.

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-- Kevin (mixesmusic@worldnet.att.net), March 27, 1999