There's good news and bad news in store for Asia as a consequence of Japan's super yen. Korea, Taiwan, and other countries with currencies limited to the dollar find themselves able to undercut Japanese rivals on price. Some are even beginning to penetrate Japan's notoriously difficult domestic markets because of their lower prices.
But the super yen is a double-edged sword, and it raises significant questions about whether Asia should continue tying itself to Japan's economy or whether it should make stronger efforts to broaden its economic relationships with other countries, especially the U.S.
The point is that a deepening embrace with Japan isn't turning out to be cost-free. The most obvious pain at the moment is being felt by nations that have borrowed heavily in yen. Indonesia, for instance, holds 40% of its $90 billion debt in yen. The Philippines, Malaysia, Thailand, and China also hold significant yen-denominated loans. Because the yen has surged in value, those loans, which were offered by Tokyo as cheap, low-interest credits, have become extremely onerous. So has the importation of components from Japan. A high percentage of the products exported by Asia are composed of Japanese parts. That cost has gone sky-high as well.
Asia's central bankers are now wrestling with the hugely important issue of whether to sell the dollars that make up most of their foreign exchange reserves in exchange for yen. To do so at this moment might be a terrible mistake. The latest round of endaka is already sending Asian manufacturers in search of less expensive American-made parts and components, increasing their need for dollars. Taiwanese computer makers who have long relied on Japanese suppliers for their chips are now looking to the U.S., because the yen has gone up 20% against the dollar so far this year.
That means the trade surpluses that the Tigers have run with the U.S., already shrinking, may drop further. How ironic that just as the yen hits superstar status, Asia's yen bloc begins to disassemble, and the dollar's importance rebounds.