Asia Needs to Lose Its Currency Obsession: The Ticker

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By William Pesek

One of these days, Japan will find a smart, savvy finance minister. Someone who can manage the disparate challenges of economics, markets and politics in a dynamic global environment.

We're still waiting, as Yoshihiko Noda so vividly reminded us last week. He directed the Bank of Japan to step into markets to stem gains in the yen that are threatening the economy. It was Japan's first intervention since Group of Seven members acted jointly in March. That one didn't do much either.

Noda's decision goes a long way toward explaining why Japan's economy is in such dire shape. It also highlights something bigger: how Asia's obsession with weak exchange rates is holding the region back.

Look no further than South Korea. Since Friday, when Standard & Poor’s cut the U.S.'s AAA credit rating to AA+, officials in Seoul have wasted little time warning speculators not to try their luck. Korea is worried that as the dollar slides, profits at companies such as Samsung Electronics Co. and Hyundai Motor Co. will shrivel. It's scrambling to keep the won from surging.

Asia needs to think bigger. Policy makers waste inordinate amounts of time and energy managing exchange rates. More would be achieved if attention shifted away from amassing currency reserves to stimulating domestic demand and encouraging entrepreneurship. Only then will the region reach its potential in creating jobs and fresh wealth.

Japan, for example, probably spent about 4.56 trillion yen ($59 billion) intervening last week, say economists such as Masaaki Kanno of JPMorgan Securities Japan Co. In other words, Tokyo blew the annual gross domestic product of Luxembourg on a move that will do little to help Sony Corp. return to profitability or help the fortunes of Japanese automakers.

Japan, and Asia for that matter, would enjoy greater prosperity by letting currency rates rise. It would stimulate companies to innovate their way around exchange rates on the way to faster economic growth. Intervening in markets only takes officials' eyes off that prize.

-0- Aug/08/2011 17:18 GMT