1. Japanese Yen Will the yen appreciate or depreciate in the near future?? Source: Bank of Japan

2. Amid current economic problems, Japan faces four major obstacles to recovery: 1)Unemployment 2)Growing Japanese government budget deficits 3)Continuing deflation 4)Crisis in the Japanese banking sector How the Japanese government and international markets respond to these four issues will largely determine the strength of the Yen going forward

3. Unemployment Problem The Past Five Months: November 2001: 5.25% December 2001: 5.35% January 2002: 5.4% February 2002: 5.5% March 2002: 5.6% 168,000 total workers laid off since November The government has pumped billions of yen into public service projects and trillions into corporate bailouts in an attempt to avoid an accelerated increase in unemployment. Source: Japan Information Network The Japanese government has pursued a policy of bailing out all companies employing more than 10,000 workers

4. As a result of continuing bailouts and spending initiatives, public debt is growing in real terms and as a percentage of GDP Source: Bank of Japan, OECD Increasing fiscal debt levels have not resulted in a commensurate increase in productivity

5. Japan’s Corporations Companies are forced to buy government securities in exchange for the bailouts Japanese companies also have close links to each other and to banks—“Keiretsu culture” This spreads the liabilities throughout Japan’s economy

6. Bank of Japan Helps Fund the Bailout Bank of Japan made a bold move by increasing its purchase of government bonds from 600 billion to 900 billion per month. The increasing portion of government debt held by the Bank of Japan is an indicator of the weakness of the commercial banking sector

7. Despite efforts by the Bank of Japan to expand the money supply, deflation continues to plague the economy Source: Japan Information Network *Money stock is broadly defined liquidity With prices falling consumers and corporations have little incentive to spend, putting further downward pressure on the currency

8. A Vicious Cycle Bank of Japan, in an effort to reverse deflation, will pump more money into the economy. The amount of MIC (money in circulation) has already increased from 1.3 to 1.6 of GDP in 4 years with little influence…… Because of huge payable responsibilities on mature bonds Japanese Government is forced to sell even more bonds….. Source: Japan Information Network *Money stock is broadly defined liquidity Source: Bank of Japan M1 M2+CDPrices

9. Current State of Japan’s Banks Current Total NPLs 24.1 trillion yen 17% of GDP; 20% default rate New record of nearly 20,000 bankruptcies. Collateral Problems Current Prices of Commercial Land is 23% of 1991 figures Source: Japan Information Network The volume of non-performing loans have revealed severe weaknesses in the Japanese banking sector….

10. Going Forward—A Risky Situation The BOJ requires all banks to hold 8% of capitalization in liquid funds to be an international lender. By this winter, three of the four largest banks had already dropped below this threshold: UFJ Sumitomo Bank Mitsui Mizuho Dropping below the 8% threshold increases costs in addition to suspending international financing activities Under new Japanese accounting regulations companies losing more than 50% paper value in a fiscal year must book the new value levels as book value. How close did Japan come to the Magic Numbers? February 6 - Nikkei average (9,420.85) 75% of all trades on the Tokyo Stock Exchange were “shorts” March 31 - Nikkei average (11,029.94) Consensus was that the banking sector would be forced to recognize these losses if the Nikkei fell below 11,000

11. Outlook for the US Dollar? Oil shocks? War in the Middle East? Increased popularity of the Euro? Bush Administration’s views? Many Uncertainties… Short-term view is that dollar will likely rise against most currencies

12. Conclusion: Will the yen depreciate and, if so, when? Yen’s depreciation will accelerate this June. Our estimate: Yen will stabilize between 140 and 160 to the U.S. dollar.