Is Asia scrapping its weak-currency fetish?
China, India, Japan and South Korea had something truly extraordinary in common last year. Asia’s four biggest economies all saw significant currency gains. What’s peculiar, though, is the lack of panic.
In years past, a 13% surge in the won would’ve had Seoul throwing the full weight of the government at speculators. Far from losing its nerve, the Bank of Korea (BoK) on 30 November raised short-term interest rates for the first time since 2011. It was a sign of confidence that Korea’s growth is sound, and a possible harbinger of things to come regionally.
Are China, India and Japan about to follow BoK’s lead? Not anytime soon. But the tolerance in China and India of last year’s roughly 6% currency gains—and Japan’s of a nearly 4% advance—is reason to be optimistic about Asia’s 2018. We may be at an inflection point where the region decides rising exchange rates can be an asset.
Or not. If a Chinese reckoning arrived or US stocks plunged, markets could see reversions to the mean—official efforts to cap currencies. Earlier this month, for example, Korea had a moment of doubt, warning the won is rising too much, too fast. There’s a growing recognition, though, that (a) the Donald Trump dollar is probably heading lower and (b) Asia must learn to live with less corporate welfare, which, ultimately, is what currency management is.
Even with US unemployment at 17-year lows, the Federal Reserve’s rate hikes are likely to be modest. Expect President Trump’s Twitter feed to cow the Fed into timidity. At the same time, Trump’s fiscal policies, trade war threats and apparent willingness to wage a physical one on North Korea and Iran are dollar-negative. Asia’s booming growth is currency-positive.
Chinese growth just accelerated for the first time in seven years. Its 6.9% 2017 pace year-on-year confounded bears betting that intensifying curbs on credit and industry would hurt. India seems poised to reclaim the position of the fastest-growth major economy in 2018, with the World Bank expecting a 7.3% year. Japan is enjoying its second longest expansion since World War II, while Korea is seeing 3% growth in 2018—not too shabby. The Indonesian rupiah, Malaysian ringgit and Philippine peso could rise this year, too.
Even more compelling is the positive-incentive argument. Weak exchange rates, it’s important to recognize, are a crutch that stymies economic development over time. Asia has no better cautionary tale than Japan, whose corporate sector even today profits at the pleasure of the Bank of Japan (BoJ).
Japan Inc. is rolling in cash. Though some of the windfall derives from strong global demand, much of it owes to BoJ’s epic easing manoeuvres since 2013. This cycle was perfected in the 1990s and 2000s, when BoJ and the finance ministry manipulated exchange rates on a nearly daily basis. In 2004 alone, Tokyo spent more than the annual gross domestic product of Indonesia weakening the yen.
Corporate welfare on so massive, so consistent and so predictable a scale took the onus off chief executive officers to innovate and restructure. Why bother when Japan’s government has your back? The trouble with Prime Minister Shinzo Abe’s revival scheme is that it borrows too much from that era. Abenomics took some modest steps to improve corporate governance, but it’s been 90% stimulus.
A key reason wages aren’t rising, though, is that executives fear they’ll need cash reserves in case the yen rallies. The weak-yen imperative caught up with Japan Inc. last year. Quality-control failures emerged like some game of corporate-scandal whack-a-mole. The troubles at Kobe Steel Ltd, Mitsubishi Materials Corp., Toray Industries Inc. and others aren’t unrelated to low exchange rates. Rather than modernize operations and take bold decisions, executives papered over cracks with weak-yen-driven profits. Korea faces a similar complacency dynamic with its giant, and coddled, family-owned conglomerates—one President Moon Jae-in pledged to end.
Tolerance of rising exchange rates is a good place to start. It’s high time Asia took a page from, say, Germany, a high-labour-cost nation with a track record of adapting to strong currencies. Rather than bellyache, German manufacturers tend to employ them as an excuse to streamline corporate structures and raise productivity, thus boosting competitiveness.
Likewise, executives from Shanghai to Seoul to Mumbai—and, of course, Tokyo—should respond to currency shifts with innovation and creativity. All a rising exchange rate is, after all, is a show of confidence from abroad. That optimism behind such capital flows would, over time, pull in more long-term investment, reduce bond yields, curb inflation and prod governments to spend more time raising economic games than gaming markets.
Asia is winning capital because its economies are set for a year of enviable growth, and policymakers need to own that fact.
William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.
His Twitter handle is @williampesek.
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