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Sunday, Nov. 7, 2010
Scholar brings economics to life
Though sometimes disparaged as 'the dismal science,' economics as presented by Noriko Hama turns into a global thriller
By TOMOKO OTAKE
Clouds of gloom have been shrouding Japan and its economy for quite some time. The bursting of the asset- inflated economic bubble in the early 1990s, and the failures of banks, insurers and other big corporations later in that decade, has put a huge dent in Japan's collective self-confidence. That is made all the more painful since it followed the country's postwar rise from rags to rich "Asian tiger" — prompting both awe and anxiety around the world.
Such days are long gone. After the bubble burst, the nation endured a self-styled "lost decade" that has now turned into two decades mired in a prolonged stagnation that has dampened consumption, wages and — perhaps most importantly — people's spirit. A study of the factors surrounding all this would seem to aptly fit the disparaging description of economics as "the dismal science."
Indeed, even rafts of government stimulus measures have failed to reverse the dismal trend or do anything to improve citizens' lives — despite official assertions that Japan experienced its longest postwar economic boom from 2002 to 2007.
Even more worrisome is the fact that much of the money the government has poured into economic stimulus measures has gone into public-works projects — mostly financed by borrowing from future generations. Consequently, with its national debt currently around ¥900 trillion, nearly double its annual gross domestic product (GDP), Japan is at risk of defaulting at any time. That risk would become even more acute if interest rates — kept close to zero through years of monetary easing by the Bank of Japan — were ever to rise significantly.
As well, adding to the dismal national mood is the fact that Japan's population is aging fast, so that within 40 years nearly four out of 10 people will be aged 65 or older.
To top it all off, the collapse of U.S.-based investment bank Lehman Brothers in 2008 dealt a sickening blow to much of the capitalist world, and Japan has been in a deflationary spiral ever since.
Where is Japan going?
In an attempt to cast light on these issues, The Japan Times has turned to Noriko Hama, a noted economist and JT columnist, for answers.
Hama, a professor of economics at the Doshisha University Graduate School of Business in Kyoto, has authored more than 20 books on the themes of the Japanese and world economies. She is especially knowledgeable regarding the international financial markets and macroeconomic policies, and has a global outlook enhanced by the many years in the 1990s she spent as a London-based researcher for the Mitsubishi Research Institute, Japan's leading private-sector think tank.
In her most recent book, "Atarashii Keizaigaku: Gurobaru Shiminshugi no Susume" ("A New Economics: A Guide to Global Citizenship"), which was published in July, she counterintuitively urges Japan's consumers to think about the severe consequences of hunting for bargains — blasting such behavior as "survival through cannibalism."
To illustrate what she means by this, Hama points to the work of U.S. fiction writer Stephen King, who in one of his books depicted in horrific detail how a shipwrecked surgeon on a desert island strives to stave off starvation by cutting off parts of his body to eat. The story's conclusion is obvious, since he cannot sustain himself through cannibalism. Hama argues it is just such a grotesque scenario that is now engulfing deflation-plagued Japan. Hence she states that people who go after unreasonably cheap goods and services will eventually pay a high price in this globalized and interdependent economy, as their behavior will drive down wages and kill jobs.
Hama recently shared her thoughts on how to confront such issues, and many more, in an hourlong interview. The following are excerpts from that exchange.
There is not much optimism among Japanese people these days. China this year overtook Japan's long-standing position as the world's second-largest economy, and Japan's population is falling and aging rapidly. So why is the yen rising against other major currencies? Shouldn't the strength of a currency reflect the strength of a country's economy?
As you point out, there seems little inevitability for the yen's value to rise. So what we are seeing now is not so much the yen's appreciation but the depreciation of the dollar. The dollar has been too strong and that's finally being corrected. The yen has emerged as a destination for the money that ran away from the dollar. And that itself is natural, since Japan is the largest creditor in the world — in terms of the volume of savings. In addition, the other alternative for the dollar — the euro — is increasingly becoming insecure. So some of the money is going into the euro, but it is only natural that a large part has been moving to yen.
What is behind the flight from the dollar?
The biggest reason is historical. The dollar should have lost its value a long, long time ago. But because the currency has spread so widely and everyone has dollars, many people have hesitated to see their dollars be devalued. Since the Lehman Brothers shock, however, the U.S. economy has been exposed as being very weak, and people who never wanted to sell their dollars have changed their minds completely. An overwhelming number of people now think that, if they don't sell their dollars, they might see them turn into worthless pieces of paper. That, I think, is the biggest reason for the dollar's fall.
How can you tell that the U.S. economy is so weak?
It's apparent from the way the economy there fails to recover despite massive fiscal spending. The unemployment rate remains high, so consumption does not pick up. The moment the government relaxes its fiscal and monetary stimuli, the economy falters. In other words, the U.S. economy cannot survive without life-support. That's what the economic indicators have shown recently.
When you say the dollar should have lost its value "a long time ago," when exactly was that?
I can pinpoint the timing exactly, and that was Aug. 15, 1971.
So long ago?
Yes, because that was the day of the so-called Nixon shock. Until that day, the U.S. dollar could be converted to gold. So anyone who took dollars to the United States could have them exchanged for gold. But on that day, the U.S. declared that it could no longer keep that promise. From that point on, the dollar ceased to be an international, key currency in the world. So from that perspective, the dollar could have fallen to a level that matched the strength of the U.S. economy. But everyone has treated the dollar in the same way they cajoled the emperor in (Hans Christian Andersen's story) "The Emperor's New Clothes."
After the Nixon shock there was the Plaza Accord of 1985 (when representatives of the U.S., Japanese, British, French and German goverments — meeting at the Plaza Hotel in New York — agreed to depreciate the dollar by intervening in currency markets), followed by Black Monday (Oct. 19, 1987, when stock prices plummeted in New York and elsewhere). Then came the Asian currency crisis of the late 1990s and the Lehman Brothers shock of 2008. Through all these events, the dollar has shown us what a dangerous currency it is, losing its clout step by step. And now we are in the final stage of the dollar's demise.
From 1947 till 1971, the dollar established itself as a key currency, and from Aug. 15, 1971, we have been witnessing a long, long epic drama about the dollar's end — and we are at the beginning of its climax.
You make it sound like an exciting story.
It is exciting, really. It is a drama of death, so it is tragic for the dollar, but it will settle where it should be.
The Japanese government intervened in the foreign exchange market in September for the first time in 6 1/2 years to stem the yen's appreciation against the dollar. But the intervention failed and the dollar has plummeted further since, and it is now at around the ¥80 level. Do interventions ever work?
There are several patterns of interventions, but unilateral interventions, frankly speaking, are like prescriptions written by quack doctors.
Why? There are two reasons for that. For one thing, it means (the authorities) are trying to stem the symptoms while turning a blind eye to the roots of the sickness. When you run a temperature, it is because you are trying to cure your cold with the heat. Unilateral interventions are like trying to lower your temperature by administering a pain-killer.
Secondly, this drug has side effects. And there are two aspects of side effects. Like narcotics, once you start using them, you can't stop; plus every time you do use them, you need a bigger dose.