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Saturday, Sept. 25, 2010

The Icarus of currencies?


Special to The Japan Times

HONG KONG — My old friend Yoh Kurosawa just threw his head back and laughed: "How can you say that the rising yen is a danger. It proves we are strong, the world regards us as best."

Sadly, Kurosawa was not around to impart his wisdom to the new Japanese economic establishment. My conversation with him took place several years ago when the yen was panicking Japanese business, financial and industrial circles as it hurtled toward 95 to the U.S. dollar. Kurosawa was chief executive of Industrial Bank of Japan, the principal financing arm for Japan's postwar economic miracle. Things were simpler then. Foreign exchange markets were big, but not as massive as the $4 trillion a day today — meaning that by intervening Japan risks spitting in the wind.

The irony, which seems to have completely escaped Prime Minister Naoto Kan is that he is trying to forestall the yen's rise to protect the one sector of the Japanese economy big enough and strong enough to look after itself. He has not yet given any indication that he understands that it is past time to reform and rejuvenate the ailing sectors of the Japanese economy.

Intervention cannot have done much for Tokyo's relations with Washington, especially when Treasury Secretary Timothy Geithner was talking tough, telling Beijing to stop preventing the renminbi from appreciating. China is still a poor if rapidly developing economy; yet here is super-developed Japan, with per capita income of almost $40,000, intervening. Moreover, Japan also has a massive current account surplus, $163 billion this year or 3.1 percent of GDP, according to IMF estimates.

I have some sympathy with Kan. The yen at 85 to 90 against the dollar reflects economic fundamentals. Japan took action after a rapid appreciation of more than 11 percent in the value of the yen since mid-May, whereas the rise in the yuan has been a pitiful 1 percent since Beijing heralded measures to free its currency. One point is the exchange rate of the currency and the other is the speed of appreciation (or depreciation).

Japan has already seen a considerable hollowing out of its industry, and industrialists warn that more jobs may be lost. Carmaker Suzuki is set to produce more cars in India than it does in Japan. Toyota President Akio Toyoda has said that his company will not abandon Japan, but says nothing about the number of cars it will make or workers it will employ in Japan. Mikio Katayama, president of electronics maker Sharp, announced that the company was moving some production of flat-panel televisions to China and called for the government to do more to soften the yen. Japan's Cabinet office in February said that ¥92.90 to the dollar or cheaper helped to keep companies profitable.

To multinational companies, it hardly matters whether cars or computers are made in Japan or China or India or the U.S. as long as they make profits. But from the point of view of a country, its economy and jobs, continuing to manufacture quality products is much more important than many modern economists pretend.

The Anglo-American model of shifting away from manufacturing to services and especially to finance does not look so attractive now. Japan has at various times tried to present Tokyo as the essential partner in 24-hour financial markets but has shied away from the social implications. The government is pressing Shinsei Bank, in which it has a stake, not to pay executives more than $230,000 a year, including bonuses, a laughably small amount by international standards of pay.

A few maverick critics contend that industrial products still being made in Japan are of such a high technology and high quality — for example, the machines and machine tools that make the manufacturing machines — that it has no rivals. This is an exaggeration: Germany is a key rival and Germany, hiding behind the ramparts of the battered euro, has been picking up orders as the yen has appreciated against the euro, too.

Nevertheless, Kurosawa is right: Japan's big exporting industrial companies are well able to protect themselves, and the appreciating yen is a mark of their success.

Japan's forex intervention opens manifold dangers. Last time the government intervened — between 2003 and 2004 when the yen was at about 110 — Japan spent $300 billion trying to stem the yen's rise, but saw the currency appreciate by 13 percent. By not working out a credible plan for the economy as a whole, Kan risks pushing Japan to the tipping point — where its economic fragility will be recognized and account taken of its massive government debts, its rapidly aging population and the fact that the government has no economic plan. Kan might see the yen drop disastrously, by 50 percent or more once the markets get real.

Kan has talked of his plans to create jobs, as if jobs grew on trees or could be bought at the local corner shop. But so far he has shown little new creative thought, except to suggest that corporate tax cuts might depend on jobs created, something easier to say than to do.

Japan increasingly looks like a society set in its ways and isolated from the rest of the world. Even some high-tech gadgetry, notably in mobile telephones, has been so closely developed for the closed Japanese market that Sharp's Katayama acknowledged the danger of the "Galapagos effect" — in which exotic animals evolved for those isolated islands.

But too much of Japan is evolving as exotic, expensive, antiquated and anti-competitive — from agriculture, where the average age of farm workers is almost 66 and the cost of pampering them with subsidies is almost the same as the value of their production, to construction (the corruption device beloved of leading bureaucrats and politicians) and education, where standards have fallen so far that Chinese universities are regarded as better than Japanese ones by international peers.

The answers are clear: reform and liberalization to promote competition and create new jobs and bring domestic manufacturing and services to the levels of the export industry that Kurosawa was proud of. But if you advocate reform, you will hit a knee-jerk reaction that this would destroy ancient Japanese culture with wasteful Western excesses.

It does not have to be so. Why should Japanese farmers not produce rice that can compete in quality and price with the rest of the world AND grow wheat and vegetables and fruits? Why should exquisitely slow Japanese service be so expensive? And is it an essential part of Japanese culture that towns are such an ugly excrescence of concrete?

Kevin Rafferty is author of "Inside Japan's Powerhouses," a study of Japan Inc. and internationalization.


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