Less than two weeks into the job, Hirohisa Fujii is annoying corporate Japan. It’s a good thing.
Japan’s new finance minister doesn’t support a weak yen. In the currency world, with its winks, nods and secret handshakes, that’s tantamount to appropriating former US treasury secretary Robert Rubin’s strong dollar policy. Fujii’s view is the right one for Japan’s future. Asia’s, too.
It’s potentially disastrous in the short run. Japan is a net exporter coming out of a global recession. You would think currency depreciation would be first on the to-do list. Maybe Fujii’s yen stance reflects a cathartic realization: It’s time to move beyond a policy crutch more appropriate for a developing economy than for the world’s second biggest.
China, for all its growth and surging stock markets, can cry poverty when it holds down the yuan. That’s a harder argument for Japan to make, even if this global crisis is widening the gap between the nation’s haves and have-nots. What has long been ignored, though, is how the weak yen encourages beggar-thy-neighbour policies in Asia.
Why shouldn’t South Korea and Singapore hold down currencies when the region’s biggest and wealthiest power does it? Officials in cities such as Beijing, Seoul and Bangkok have long suggested that once Japan lets the yen strengthen, it will be easier for them politically to ease up on exchange rates.
Asia may be approaching that point. The question, of course, is whether Fujii can stand the fire. Pressure from the newly out-of-power Liberal Democratic Party (LDP) is one thing. The bigger issue may be the urging he gets from his own party to help exporters. They will argue that Japan is in danger of being left behind by a global trade recovery as the yen hurts competitiveness and erodes profits.
In August, Japanese exports fell 36% from a year earlier, an 11th straight decline. The yen is hindering household names, including Panasonic Corp. and Toyota Motor Corp.A weaker won, meanwhile, helped the earnings of South Korea’s Samsung Electronics Co. climb 5.2% last quarter.
The bigger picture is worth considering. Germany, the world’s biggest exporter in 2008, offers a prime example. Its companies don’t exert much energy bellyaching about how the strong euro is killing business. They find ways to profit in spite of exchange rates.
Japan would be wise to consider something that Paul O’Neill said in 2002. Former US president George W. Bush’s first treasury secretary angered US exporters when he said good chief executive officers don’t live and die by exchange rates. They adapt and move on. Twenty years after its asset bubble burst, Japan has been reluctant to acknowledge just that.
Granted, the US probably isn’t all that bothered by the dollar’s declines these last two years. It’s hard to make an argument, though, that the treasury is manipulating the dollar lower. Whether Asian central banks—which own loads of US currency—like it or not, the dollar’s slide reflects economic fundamentals. So long as the move is orderly, a softer dollar isn’t a major problem for investors.
Many in Asia were more perturbed by Rubin’s strong dollar because it acted like a magnet for capital—pulling it away from Asia. It supported US stocks, held down long-term interest rates and contained inflation. It was the ultimate sign of confidence in an economy that was flying high.
Asia could use these dynamics. Services account for almost two-thirds of Japan’s $4.9 trillion (Rs235 trillion) economy. And yet the LDP spent much of the last decade weakening the yen to help manufacturers. If only policymakers had spent more time encouraging entrepreneurship and start-up companies to create more jobs and wealth.
Japan’s new Prime Minister Yukio Hatoyama also has a different goal than that of his predecessors over the last 20 years. The LDP focused on corporate interests, and a weak yen was a form of welfare for Japanese companies. Hatoyama’s Democratic Party of Japan aims to boost consumers’ purchasing power.
Corporate welfare is very much in vogue these days. Look no further than the US, that former bastion of free-market ideology. In Tokyo, Hatoyama is under pressure to grant Japan Airlines Corp. (JAL) a fourth state bailout since 2001.
JAL has long been a microcosm of what ails Japan as it struggles to shake off two decades of minimal growth. Like Japan’s economy, it is laden with debt. Also, JAL is a reminder of how much of the old Japan—with its clubby ties between government and industry—remains.
It’s against that backdrop that Fujii’s yen stance is refreshing. Exchange rates are an important shock absorber, yet they can be overused.
Rather than fixing its economic weaknesses, Japan has long used the yen to conceal them. That strategy may have run its course now, which is stellar news for Japan and the rest of Asia.
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