Dec 8,2002
	(Dec 8,2002) Japan’s Economic Recovery and a Weak Yen Policy The level of foreign exchange rate gives a great impact on industrial structure and asset prices. In that sense, foreign exchange policy should be a very important agenda in the argument of Japan’s economic recovery. However, foreign exchange policy has generally been argued in the context of how to avoid currency crisis, or how to stabilize foreign exchange rates. It was not an approach to make positive use of foreign exchange rates for economic recovery. In Japan, monetary policy and fiscal policy have already been fully utilized but the economy is still sluggish. I think this is because the yen is too strong compared with the actual economic power of this country. A weak yen policy will be sure to help overcome asset deflation. The Impact of Foreign Exchange Rates on Industrial Structure and Asset Prices Why will weak yen vitalize Japan’s industry and lift up asset prices? Agriculture Japan’s agriculture is dwindling not because Japan is an industrialized country, but because the yen is too strong. The strong yen enables us to buy foreign agricultural products very cheaply. If the yen becomes weak, Japan’s agriculture will be revitalized, because Japanese will sell farmland in China and buy back farmland in Japan. The price of farmland will go up. Industry The hollowing out of industry is going on now. This is because domestic labor cost is too high. But ‘international competitiveness’ is measured on dollar basis. If the yen is devalued, Japan’s international competitiveness will go up on dollar basis, and factories will come back in Japan. Manufacturing companies will sell factories in China, and buy them back in Japan. The price of industrial land will go up. Leisure You can play golf in Hawaii very cheaply, because the yen is strong now. If the yen becomes weak, Japanese will play golf in Japan. Japanese will sell golf courses in Hawaii and buy them back in Japan. The price of land for golf courses will go up. Why will Higher Asset Prices Help Economic Recovery? Remember the bubble period. Most Japanese people seem to have bad impression on the word, because they think it was a period when all people were bent on making money and made big losses afterward. But during the period, the economy was strong at least. The Nissan’s luxury car named ‘Cima’ sold very well, and people called it a Cima Phenomenon. Why did the phenomenon happen, then? It was because people who made money on stocks and land rushed to buy luxury cars, whether those profits were realized or unrealized. It was so-called ‘assets effect’ in economic term. The Nissan Motors, which made money on Cima Phenomenon, increased capital investments, buying land for construction of new factories. Land prices went up, and as a result bad assets turned into good assets. Then uncertainty over financial systems was shrugged off. The Nissan Motors paid good bonuses to its workers, eliminating lay-off risk. Personal consumptions increased, and everything got into gear. CPI and WPI will not Go Up CPI and WPI are not very important for economic recovery. Even during the bubble period, CPI and WPI went up by only three to four percent. It was only asset prices that skyrocketed. Current economic condition is so bad that CPI and WPI will not turn positive easily. Paradoxically speaking, economy can recover even under negative CPI and WPI. The experience during the bubble period tells us so. I wish the government and politicians who are enthusiastic over lifting up consumer and wholesale prices would become aware of this fact early. The Relation between Currency and Economy Is there any good example of economic recovery with the help of currency devaluation? China’s Case In 1980, the official exchange rate for Chinese currency was 1.5 per dollar. In 1994, it was pegged to the dollar, and has been trading at around 8.3 per dollar since 1997. The value of one Chinese currency versus the yen has been decreased from 151 yen in 1980, to 13 yen now. The movement of the exchange rate of Chinese currency versus the dollar has been as big as the depreciation of the yen from 120yen per dollar to 660 yen per dollar. Versus the yen, it was as big as 120 yen per dollar to 1,400 yen per dollar. With thus huge depreciation of the currency, it is natural that Chinese economy became strong until it is called world’s factory. The United States The Plaza Accord in 1985 was to let the dollar weaken to reconstruct US economy, and the Louvre Accord in 1987 was to stop further depreciation of the dollar, because European economy started to deteriorate and inflationary fears emerged in the United States. Some market participants think that the US government may abandon strong dollar policy in consideration of agricultural groups and manufacturers. But I think the United States will not abandon strong dollar policy easily, because of the merits of keeping the status of a key currency. By just printing bills, the United States can buy anything in the world. To keep the status of a key currency, the currency should be strong. Asian Countries I understand that the Asian Currency Crisis in 1997 was a failure of a great experiment of fixed exchange rate systems. Asian countries took fixed exchange rate system to introduce foreign capitals. However, Asian currencies became too strong for their economic power because of fixed exchange rate system, and the bubble burst. After the Crisis, many of Asian countries gave up fixed exchange rate system, and their currencies are trading at lower levels than before. Their economy recovered as their currencies were depreciated. How to Let the Yen Weaken I propose the following three measures to let the yen weaken: (1) Massive foreign exchange intervention The Ministry of Finance seems to have a huge amount of money for foreign exchange intervention. Also, the BoJ can legally underwrite FB’s, which the government issues for foreign exchange intervention. (Until March, 1999, FB’s were exclusively underwritten by the BoJ.) From the viewpoint of the soundness of the BoJ’s balance sheet, it is much better than the BoJ’s underwriting of government bonds. (2) BoJ’s purchase of US government bonds Legal problems were not cleared to carry this out yet, but if this is done, the announcement effect is very big. (3) MoF’s issue of dollar-denominated government bonds The MoF should issue one-year dollar-denominated government bonds for individual investors. Individual investors will buy them without hedges. The MoF’s sales of spot dollars will be offset by one-year-forward dollar purchase. By this hedge transaction, the MoF can eliminate foreign exchange risks, and funding cost will be almost the same as yen yields. Demerits of weak currency Generally speaking, there are two demerits for a weak currency. One is inflation. But this is not a demerit for current Japan. A weak yen policy is to create inflation, instead. Another demerit is an increase of foreign currency denominated debts. But fortunately Japanese government and financial institutions have little foreign currency denominated debts. Therefore this is not a concern for us either. Summery There has been little discussion over a foreign exchange policy in Japan. I think a weak yen policy is the only way for current Japan to overcome economic stagnancy. But I don’t think asset inflation caused by a weak currency is almighty for economic recovery. The most important is a structural reform from practical socialism for real capitalism. A weak yen policy is a measure to earn time for the reform.