Japanese Eye The Buck Warily

If anyone can shore up the sinking dollar in today's tempestuous foreign exchange markets, it's the Japanese. After all, Japan is the world's largest creditor, just as the U.S. is the world's largest debtor. All that's needed is for the Japanese to start plowing their huge dollar trade receipts into U.S. bonds or other long-term investments, as they did through much of the 1980s.

Don't bet on it, says William P. Sterling of Merrill Lynch & Co. The problem, he notes, is not just that earthquake damage is biting into Japan's surplus savings, but also a weak dollar fosters "credit revulsion" among Japan's investors.

Just as Americans saw the dollar value of their Mexican holdings plunge after the peso collapsed, many Japanese have seen the yen value of their U.S. investments erode as the dollar has fallen ever lower against the yen. Indeed, if Japan's dollar investments over the past decade were worth the same in yen terms as they were when they were first made, their cumulative value today would be some 47 trillion yen, or $519 billion, higher (chart). The upshot is that many "burned" Japanese investors are likely to remain less than eager to commit their dollars to long-term U.S. assets.

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