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Friday, Aug. 27, 2010

Downside of a yen haven


Special to The Japan Times

HONG KONG — Is the world economy about to enter the second part of a double dip, or is it merely bumping along the extended bottom of what will eventually be a U-shaped recovery, or is it a long L with no real upturn in sight? Or is there no clear pattern of who's up and who's down?

Economic pundits in the West don't seem to know, and in Asia few people seem to care because economic growth is still going gangbusters, except in Japan.

News this month that China has finally passed Japan as the world's second biggest economy in dollar terms got more publicity than it deserved. In the real world of what you get for your money (purchasing power parity), China has been bigger than Japan for some time and is now twice as big.

The clear reality of who is second and who is third should remind the rulers in Tokyo how badly they have mismanaged the economy. This fact was underlined by Japan's own poor growth figures, showing a paltry 0.4 percent annualized in the April-June quarter, well below the 2 to 3 percent forecast by leading international economists. The appreciation of the yen to 15-year highs against the U.S. dollar has not yet been reflected in the growth figures.

The other telling part of the plight of a sickly global economy is that the yen has reached new 15-year highs against the U.S. dollar in spite of Japan's obviously ailing economy because it is perceived as a "safe haven" currency. The strong yen is already forcing major Japanese manufacturers, like Toyota, to re-examine which operations can continue to a make a profit in Japan at ¥85 yen (or stronger) to the dollar. This can only darken prospects for Japanese growth, exports and jobs.

Reports that China has been helping push the Japanese currency toward new highs by switching from U.S. treasuries and into yen instruments provoke the question of whether Beijing's fears about the U.S. dollar are the whole explanation or whether it sees an opportunistic opportunity to hurt Japan at the same time.

For all its huffing about the damage of a strong yen, the Kan government can do little. It doesn't have enough money to throw at the market. The best it can hope is to nudge the yen back when the haven- seekers reconsider how safe Japan really is. Joint intervention by several countries might have more success, because it would send a common signal.

Frankly, the rest of the world does not give a damn about Japan. Successive Japanese governments have failed to play a full role in international affairs. If you don't make friends with other leaders, can you really expect them to come to your help when times are tight?

Some Japanese academics claim that their country can now relax and fall to fifth or 55th place in the world and enjoy itself without worrying about the rat race of the rest of the world. Another mistake. If Japan's exporters, hit by the rising yen, cut domestic jobs and take production abroad, this would be a big blow not merely to the economy but to the country's manufacturing expertise.

Meanwhile, cash-flush China is already causing some concern because of large purchases of shares of major Japanese companies, with more than $6 billion invested in Japan.

As for China, the popular headlines were whether its economy would overtake the United States by 2030 or perhaps as soon as 2020 in purchasing power parity. But leaders should be focusing on the problems and challenges ahead in developing the economy and society to the next level.

The next level requires transformation in qualitative terms, including making the economy more sophisticated and producing higher-value products to allow more jobs at higher wages; spreading the benefits of growth and bringing poor Chinese and poorer regions into the modern mainstream economy; rebalancing the economy so that it is driven more by domestic consumption than by exports; as well as developing a more harmonious economic relationship with the rest of the world.

It would be a big mistake for Beijing to imagine that China is now big enough not to bother about the rest of the world, or to imagine that all its planners need to worry about is whether the property market is bubbling in selected cities and whether the country can achieve a soft landing after the withdrawal of the stimulus measures that have successfully seen China shrug off talk of recession.

If the U.S. economy does hit a double dip, or prove to be in an extended U or L, there will be repercussions elsewhere, including in Germany and China. The U.S. debate about the value of the renminbi is dormant rather than dead, and would resume in earnest with demands from U.S. senators for action against Chinese exports.

Robert Reich, the Berkeley professor who was President Bill Clinton's secretary of labor, pointed out last week that the world's No. 2 economy has dozens of billionaires, but "the typical Chinese lives off the equivalent of about $3,600 a year."

In the U.S. and Europe there are hundreds of pundits, economists and think tanks pouring out a profusion and confusion of ideas and criticisms of government that, at least, perform the important task of keeping governments and politicians honest.

As for Japan, every time the economy hit a roadblock in the 1990s, the government announced new "stimulus" measures that greatly benefited construction companies and their crony politicians but did about as much for the economy as digging holes in the road and filling them in.

For example, parts of Osaka have special street markings for blind people, yet in 30 years of visits to Japan, I have seen about a dozen blind people walking and none of them brave enough to tread the path laid by the planners through marauding cyclists. Perhaps that's an accurate metaphor for Japan — economic planning for the blind.

China today has real economic and social problems ahead and real issues about how to solve them, all of which need debate and argument that, if nothing else, may make the government more honest in trying to find solutions. Unfortunately — for China — the blooming confusion of 1,000 pundits is the last thing that Beijing is prepared to tolerate.

Kevin Rafferty is editor of PlainWords Media.


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