A Weaker Yen Won't Strengthen Japan
By Brian Bremner
One of the biggest Japanese myths still going is that when times get tough, a little yen depreciation is a great tonic. This owes much to the fact that Japan continues to view itself primarily as an export powerhouse. And what's good for exporters, more or less, is good for the entire archipelago.
That's why the latest suggestion, drawn from Tokyo officialdom's grab bag of policy gimmicks, goes something like this: Hey, why doesn't the Bank of Japan (BOJ) start purchasing billions worth of high-quality foreign bonds? To do that, it has to print scads of new yen, which would cause the currency to tumble, pushing it from 124 to the U.S. dollar now to maybe 200. That's great for Japanese exporters.
Better yet, the cost of imported goods priced in foreign currencies will rise -- in theory. Japan is suffering from deflation, right? So, we could get an export boost and price stability in one fell swoop.
FEW OPTIONS LEFT.
Some very serious minds like this rather unwise idea. They include Japanese Economy Minister Heizo Takenaka, the Organization for Economic Cooperation & Development, and -- according to media reports - some economic advisers inside the Bush Administration. These folks aren't to be trifled with. And to be fair, meddling with the currency rate is pretty much the only option left for a Japan beset by plunging profits and consumer prices and in the grips of yet another recession.
But is a weaken-the-yen policy really the elixir it's cracked up to be? Some voices dissent, including HSBC economist Peter Morgan. First of all, exports represent only about 10% of Japan's $4.5 trillion or so economy. The usual suspects -- Sony, Toyota, Honda, and Canon -- probably would get a bit of a lift. And a profit rebound would make the lucky workers at those big multinationals feel more secure.
Yet the great unwashed of the Japanese economy -- the far bigger clutch of domestically focused suppliers, wholesalers, and all manner of service companies -- probably wouldn't. Their woes have little to do with yen gyrations, but everything to do with excess capacity, debt, and labor. Only a cathartic round of cost cutting and restructuring will bring them back.
Furthermore, Morgan, who has done some extensive research into the causes of Japanese deflation, doesn't think the interplay between a falling yen and price stability is as clear-cut as its advocates say. His in-house econometric models figure that for every 10% depreciation in the yen, consumer prices rise just 0.1%. "Therefore, the yen would have to fall to well below 200 yen [to the U.S. dollar] to raise the consumer price index a percentage point," he points out in a recent report.
O.K., so what? The BOJ can do whatever it takes to slay the deflation dragon, including printing yen and using them to buy billions of dollars of U.S. Treasuries. True. But Japan doesn't operate in a vacuum. Its actions have big implications, especially for the middling economies in the region, such as South Korea, Taiwan, and Singapore. Their economies are far smaller than Japan's, far more dependent on exports for growth, and in pretty grave shape too.
Back in 1995, the Japanese yen shot up to a scary high of 85 to the dollar. After a lot of yelping in Japan, the BOJ, the U.S. Federal Reserve, and Germany's Bundesbank jointly intervened soon after to push up the dollar and pull down the soaring yen that was killing the Japanese economy. Great for Japan, but awful for its major trading partners in the region, whose export prices shot up as the value of their dollar-linked currencies rose with the greenback.
By 1997, the yen had fallen to about 120 to the dollar. And by then, export volumes of Indonesia, Singapore, South Korea, and Thailand had gone into a free fall. That slammed these economies, which were already beset by high dollar-denominated short-term foreign debt, real estate bubbles, and fragile banking sectors. What came next was the Asia financial crisis.
True, in those days, Southeast Asia's Tiger economies generally linked their currencies to the dollar, whereas they do so less now or not at all. But if the Japanese suddenly launched an export market-share grab with a dramatic depreciation to, say, 200 yen to the dollar, the Tigers likely would follow suit. A series of beggar-thy-neighbor currency devaluations is the last thing this very enfeebled region needs.
Why would the U.S. be willing to see Japan do this? Well, having the BOJ suck up enormous amounts of Treasuries would certainly help keep interest rates low Stateside. But the cost to the American and global economies would be significant. U.S. exporters probably would see their sales books slammed as the yen depreciated sharply against the dollar. Perhaps the shortsighted calculation is that everyone is far better off in the long run with the world's second biggest economy on the mend -- even if it means giving up some short-term export growth along the way.
BEHOLD THE BUBBLE.
However, history teaches that sudden and abrupt exchange-rate reversals often have unintended results. The Asian financial crisis is one example, but so is the fabled Plaza Accord in 1985. Back then, the Group of Five largest industrialized economies orchestrated a depreciation of the then-strong dollar vs. the yen to remedy an ugly trade deficit in the U.S. and bail out the Caterpillars and Fords of the world that were getting trounced by Japanese and other rival exporters.
Well, it worked as a quick fix for the U.S. But when the yen soared and Japan's export growth stalled, the powers that be in Tokyo counteracted with rapid interest rate cuts that lit a fire under real estate and stock prices. In short, the Plaza Accord, plus some bad monetary calls and a passive government, created Japan's Bubble Economy of the late 1980s and a subsequent decade-long stagnation.
So beware of calls now in Japan and elsewhere for a so-called Reverse Plaza Accord that would torpedo the yen's value against the dollar. The world economy is far more integrated in terms of trade linkages and capital flows than it was back in 1985. Japan may think it has found a quick fix to all its woes, but it risks doing far more damage if it sends the yen into a free fall.
Bremner, Tokyo bureau chief for BusinessWeek, offers his views every week in Eye on Japan, only for BusinessWeek Online
Edited by Beth Belton