By Wayne Cole
TOKYO, Nov 29 - The thorny issue of whether to weaken the yen is a long-running one with both Japanese and U.S. officials regularly waxing and waning on the idea.
But the tale has taken a new turn since the Financial Times reported last week that the Bush administration was in favour of the Bank of Japan driving the yen lower by buying foreign bonds.
Dealers suspected Washington's motives were not entirely altruistic since if the BOJ did buy offshore bonds they were likely to be largely Treasuries, and that might go some way to countering the sharp rise in bond yields seen in recent weeks.
With the bond market worried about government stimulus packages and the extra debt issuance they might entail, it could make sense for the United States to encourage Japanese buying of T-bonds. Japanese investors are already the largest holders of Treasuries, having around $311 billion at the end of August, or more than 11 percent of all private holdings.
"The rumour was the Japanese would get a weaker yen while the Bush government gets the Japanese to underwrite their extra fiscal spending by buying bonds," said a U.S. bank dealer.
MUDDY WATERS

However, waters were muddied this week when talk circulated that a well-known U.S. investment advisor was reporting the Treasury was actively opposed to weakening the yen, by any means.
This morphed again into rumours Treasury officials had denied any such opposition and were, in fact, in favour of a lower yen.
Neither was the picture any clearer on this side of the Pacific.
Various officials at the Finance Ministry and the BOJ first played down the idea of buying foreign bonds, only for Economics Minister Heizo Takenaka to declare on Thursday that it was well worth considering.
"The government probably likes the idea because the bonds will end up on the BOJ's balance sheet, so it takes all the risks," said James Malcolm, an economist at J.P. Morgan.
"And the BOJ probably dislikes the idea for exactly the same reason," he added.
Still, Takenaka's comment was enough for the dollar to tick up a quarter of a yen to 123.25 yen since the whole point of buying offshore bonds is to push the Japanese currency lower.
THE MULTIPLIER EFFECT
Weakening the yen is touted as a relatively easy way to spring Japan out of stagnation, partly by giving exporters a boost and by combating deflation through higher import prices.
But many analysts familiar with Japan's problems consider the idea misguided, if not downright dangerous.
"Essentially we're talking about exporting Japan's deflation to the rest of the world, and that's the last thing the world wants," said Ron Leven, currency strategist at Lehman Brothers.
Just two days ago Federal Reserve Governor Laurence Meyer raised the spectre of U.S. inflation turning to deflation, leaving monetary policy unable to achieve the negative real interest rates upon which recovery might depend.
He also lamented the dollar's strength, saying it had not provided the stimulus that would have normally been expected when a country cuts interest rates by 450 basis points.
Analysts doubted, then, that he would be happy to see the dollar not only rise on the yen but go a lot, lot further.
Proponents of a weaker yen often cite a fall to 140.00, or a decline of around 12 percent, as sufficient to defeat deflation.
But this time last year the yen had just embarked on a fall from 105.00 to 125.00, a drop of 16 percent. Now a year later, not only has deflation not been beaten, it has grown, with consumer prices falling at an annual rate of over 1.0 percent.
Since Japan is the most closed of all the major economies -- exports make up about 12 percent of GDP and imports less than 10 percent -- many analysts argue the yen would have to fall an awful long way to have an impact on deflation.
"We reckon it would have to drop to at least 180.00 to the dollar," said Leven. "Can you imagine what a competitive boost like that would do to U.S. and euro-zone industry? Nightmare."
Which is also why he reckoned it would be politically unsustainable for Washington to sanction such a drop. The rest of Asia, too, were unlikely to sit idly by while Japan stole market share out from under them and pressure for competitive depreciations would spread across the region.
Some claim the costs would be worth bearing if it meant Japan, the world's second-largest economy, got back on its feet.
But others question the wisdom of shifting production from the highly productive U.S. to still-hidebound Japan, which is essentially what weakening the yen entails.
"That output would have a far greater multiplier effect in the U.S. than in Japan," said Leven. "And growth in the U.S. is worth more to the rest of the world than any pick-up in Japan."