Readers' Voices - Volume 1

A weaker currency will make Japan stronger
(Kumiharu Shigehara)

GLOCOM Platform Media Reviews
News Review #118: April 3, 2003
Reviewed By Hitoshi URABE
The writer, as footnoted in the article, is former deputy secretary-general and chief economist of the OECD, who served as Head of Economics Department in the organization before that, and actually a veteran of Bank of Japan.The title of the article is somewhat short of covering the significance of this writing, as Mr Shigehara is proposing an extensive list of policy suggestions for Japan to recover. There are ten suggestions clearly itemized and numbered.
The list starts out by suggesting for the balance of bank reserves to be targeted in accordance with GDP growth, and in line with targeted inflation to which he refers later in the list. Then, by placing the viewpoint on the importance of trade for Japan, a number of recommendations are listed. It suggests the target range of the yen exchange rate to be announced, and at the same time it should be made clear that bank reserves are adjusted to compensate for fluctuations in the bank reserves caused when interventions are executed.
In order to avoid tensions from abroad in placing such exchange rate policy, and to enhance revenue, a special tax is suggested to be levied on those industries that benefit through windfall incomes caused by the realization of the aimed exchange rate, from which the fund would be utilized to assist those workers losing jobs through corporate restructurings. As the last item, the list does not forget to emphasize the importance of trade liberalization in general, where it insists for Japan to play a large role.
As the writer admits, some items listed are difficult to implement, and there could very well be opposing views on some of them. But this concise and comprehensive list of suggestions could act as a good springboard for discussions to be based upon.

Letter to the FT editor: April 4, 2003
A weaker yen may be just a temporary boon
From Mr Ko Unoki
A weaker yen, in the range of 150-160 yen to the dollar, as suggested by Kumiharu Shigehara ("A weaker currency will make Japan stronger", April 2', could be a temporary boon for those Japanese companies that are heavily dependent upon exports. However, in the light of the massive and persistent trade surpluses that Japan manages to chalk up with the US and Europe, the international acceptability of such a proposal comes into question.
A weaker yen may also induce other Asian nations, such as China and Korea, to devalue their currencies in order to maintain competitiveness against Japanese exports, leading to an exacerbation of excessive price competition and further slimming of profit margins. Furthermore, weaker yen may not help the Japanese economy substantially, since only about 20 per cent of the total number of workers in Japan are employed in certain companies, belonging mainly to the electronic and vehicle sectors, that are internationally competitive and contribute to the bulk of Japan's exports.
What Japan needs to do is to undertake more economic restructuring that would improve the competitiveness of those industries, including construction, agriculture and services, that employ 80 per cent of the workforce, by further opening up domestic market to competition.
Instead of racking up greater trade surpluses with a weaker yen, Japan needs to increase imports that would lead to more domestic competition, lower costs and increased purchasing power for the long-suffering Japanese consumer.

Ko Unoki,
Tokyo 165-0035, Japan

A rejoinder to Mr. Unoki's letter to the editor of the Financial Times
Friday, April 4, 2003
In commenting on my article "A weaker currency is the best medicine for Japan", the original version of which had had a more balanced title "A global solution to deal with the Japan problem", Mr. Ko Unoki appears to have missed an important point, see his letter to the editor of Friday April 4, 2003.
If all companies try to reduce wage and non-wage costs through restructuring in their efforts to regain international competitiveness, aggregate nominal income will continue to decline, and thereby aggravate debtors' balance-sheets and increase banks' new bad loans, leading to a vicious circle of deflation. In an open economy context, further large discretionary fiscal expansion would tend to put upward pressure on the yen and increase the working of deflationary forces through this exchange rate mechanism. Replenishment of bank capital bases and other measures of bank restructuring cannot fully offset the working of such forces.

Note that what matters here is the size of open, "tradable" sectors in the entire economy, and not the share of actual exports in gross national product. Indeed, the share of exports in gross national product would have been much higher if Japan's exports had risen in line with the growth of world export markets over the past decade or so.
Problems about Japan's trade account surpluses should be dealt with by further market opening and reform with a result of increasing "import content" of Japanese domestic demand rather than by containing exports through allowing the yen to remain too high.

Kumiharu Shigehara

Comments from an American economist
Kumi, here are my quick thoughts.

(1) Japan still has large current account surpluses, so it will be difficult to get as large a currency depreciation as you envision, and especially if,as I expect,Japanese assets become more attractive to both Japanese and foreigners as recovery begins to pick up a bit.
(2) I would put more stress on stimulating domestic demand in Japan than you do. True enough, fiscal expansion in the past was inefficient because not focussed enough on projects with substantial multiplier effects. However that may be, I would still argue that over the long run Japanese authorities are best off playing down (to the extent the practically can) the dependence on net exports that has been endemic to Japan because it has been such a high private saving economy. I actually favor taking 3 per centage points back off the consumer tax as a psychological boost to domestic spending. Adding that 3 points three or four years ago (forgot when exactly) was a psychological disaster so far as I could see.
(3) I doubt you could get the U.S. under current conditions to agree to so weak a yen and as high a dollar as you contemplate. The outlook for domestic demand here at the moment is terrible.Personal saving rates are rising, the surprise so far being that they have risen so modestly. Businesses show very little sign of a significant lift in investment spending. In my view, without the war and its preparations, our economy would be pretty bad shape. The expansionary swing in the structural deficit here has been a major factor sustaining the economy. Growth here depends to a great extent on more domestic demand in Europe and Japan, so that there will be little incentive to agree to a very strong dollar; rather, our businesses will want to be especially well positioned to compete abroad as demand recovers there (when and if). Incidentally, my impression here is that the huge contribution of productivity gains to reducing labor costs is pretty much behind us, and that real labor costs will become a greater burden on businesses. That too argues for a weaker not stronger nominal value of the dollar on fx markets. Just another difficulty in the politics of exchange rate cooperation.

Stephen Axilrod,
Global Economic Consultant

Comments from a French banker
Je trouve votre programme de redressement très intéressant, ambitieux et de haute tenue. Le seul point vraiment difficile concerne mon avis la coopération des partenaires, que vous paraissez juger souhaitable. Or il me semble que les twin deficits US nous exposent une dépréciation du USD laquelle la coopération aura du mal s'opposer efficacement. De son côt, l'Europe ne voudra rien faire pour accentuer l'appréciation de l'euro, given la faiblesse de la croissance. Bref, je nevois pas ces deux zones s'entendre pour faciliter la vie de vos compatriotes. Mais il n'est pas nécessaire d'espérer pour entreprendre.

Robert Raymond
Former Director General of the European Monetary Institute