He said "extraordinary" Asian central bank buying of dollar
assets had totaled almost $240 billion since the start of 2002,
describing the size of Japan's purchases as "awesome."
The central banks of China and Japan have been heavy buyers
of U.S. assets to park the proceeds from selling their own
currencies to try to prevent them from rising against the
dollar and so hurting their exports.
"The current performance of the Japanese economy suggests
that we are getting closer to the point where continued
intervention at the present scale will no longer meet the
monetary policy needs of Japan," Greenspan told the Economic
Club of New York.
Japan's top government spokesman, Yasuo Fukuda, said in
Tokyo later that he did not regard the Fed chief's comments as
criticism and that Tokyo would continue to act appropriately
when there were sharp exchange-rate swings.
To finance this intervention, the central banks are
essentially printing money which then floods their domestic
economies, threatening inflation, Greenspan suggested.
Japanese monetary authorities bought almost $100 billion in
January and February in their efforts to prevent the yen from
rising rapidly and damaging the nation's export-led recovery.
Much of the money has found its way into U.S. Treasuries,
and is widely thought to be supporting the U.S. bond market and
keeping yields lower than they would otherwise be.
Analysts said that if the central banks did slow or stop
their buying, this could push U.S. rates higher and lift
borrowing costs for U.S. businesses and consumers.
As for China, Greenspan warned that the Chinese central
bank's large purchases of U.S. dollars to keep the yuan in a
close band pegged to the dollar could threaten an "overheating
of the Chinese economy."
TOKYO RECKONING NEAR
Greenspan has referred to Asian central bank buying in
other appearances over the past month, but his comments about
Japan seemed unusually explicit.
The Fed chief said it seemed likely that Tokyo's rate of
accumulation of dollar assets "will have to slow at some point
and eventually cease" once the current situation of declining
prices, or deflation, is past.
"He told the market something a little bit new, that
Japan's getting closer to the point where intervention would
not fit with the monetary policy goals of the country," said
Alan Ruskin, research director at 4Cast Ltd.
The Fed chief acknowledged concerns that less buying of
U.S. Treasury securities could put upward pressure on U.S.
interest rates but played down those fears.
"While there are obvious reasons to be concerned about such
an outcome, the effect of a reduction in the scale of
intervention, or even net sales, on U.S. financial markets
would likely be small," Greenspan said.
That is a view that some in the Treasury market dispute,
because of the scale of foreign central bank buying.
Greenspan also played down worries that a narrowing of the
yawning U.S. current account deficit would result in a crisis
for markets, saying the declining dollar would help curb the
trade gap over time.
"The currency depreciation that we have experienced of late
should eventually help to contain our current account deficit
as foreign producers export less to the United States," he
He noted foreigners' claims on the United States
represented by the U.S. current account imbalance have grown
markedly and that it was hard to say when that will slow or
even reverse, "but it is evident that the greater the degree of
international flexibility, the less risk of a crisis."
LOW FOR A REASON
Asked about U.S. interest rates, Greenspan repeated that
the federal funds rate, now at a 1958 low of 1 percent, had
been kept low for "very good reasons" but must rise eventually.
"The Federal Funds rate is accommodative and at some point
it will have to rise back to a more neutral state, because it
is inconsistent with general long-term stability," he said.
Greenspan was asked about the U.S. central bank's
performance during the 1990s -- a period for which it has been
retroactively blamed because it did not push interest rates up
enough to curb a stock-market bubble that eventually burst.
The Fed chief seemed to back away a little from his
previous defense of the Fed's actions, saying he has concluded
"tentatively" the Fed did the right thing but it might be five
or 10 years before the answer was known, (Additional reporting
by Glenn Somerville)