Japan in the world economy
lnp3 at panix.com
Wed Apr 24 06:03:48 MDT 2002
Wall Street Journal, Apr. 24, 2002
New View of Japan Emerges
As the Yen Keeps Dropping
By ROBERT A. GUTH, MICHAEL M. PHILLIPS and CHARLES HUTZLER
Staff Reporters of THE WALL STREET JOURNAL
With Japan's currency dropping like a stone lately, familiar howls of
protest can be heard from some powerful players in the world economy.
In the U.S., the Big Three auto makers are complaining about the profit
windfall that a strong dollar-weak yen combination gives the likes of Honda
Motor Co. China's textile and electronics exporters are lobbying their
government to guard their competitiveness by cheapening the yuan, a move
that could plunge Asia into a new round of debilitating financial instability.
But what's most striking about this latest chapter in Japan's slow-motion
economic collapse is an important shift in the way the world views Japan.
For decades, when the yen has slipped too far, foreign policy makers have
groused loudly about the unfair advantage it offered to Japanese companies.
Now there's little of the usual protest from Washington and Beijing.
Indeed, some Bush-administration officials have been saying privately that
a cheap yen might not be such a bad thing, provided that the Japanese also
embrace tough reforms. And the Chinese are showing no serious signs of
weakening their own currency to counter the Japanese edge.
The reasons for this equanimity say a lot about the way the world has
changed since the postwar years, when Japan seemed poised to swamp the rest
of the world in a tide of cheap exports. Japan may still be the world's
second-largest economy, but it's a badly wounded giant, so feeble that it's
dragging everybody else down. If the country's wobbly banking system
implodes, it could trigger a global recession. The U.S. and China in
particular are desperate to see Japan regain its footing, and there's a
growing sense that an export-led recovery may already be cutting the odds
of a full-blown crisis. For instance, exports are starting to jump, giving
a boost to the electronics industry, a mainstay of the Japanese economy.
Just as important, the pain inflicted on the U.S. and China by a soft yen
is less than commonly assumed. World trade patterns have changed
drastically in recent decades, as each of the three nations has focused on
industries in which it enjoys a competitive advantage. In the case of Japan
and the U.S., for instance, businesses in the two countries don't often
compete head to head, outside of autos and a few other industries.
"The bottom line is I don't think [the yen] will have any significant
long-term impact on us one way or the other," says Scott McNealy, chief
executive of server maker Sun Microsystems Inc. "It might on Japan, but not
on Sun Microsystems."
In a February letter to Big Three auto executives, U.S. Treasury Secretary
Paul O'Neill laid out some of these themes. He rebuffed the industry's
calls for a cheaper dollar, noting that the strong U.S. currency reflects
the fact that America has performed "extremely well" and attracted foreign
investment, driving up the dollar. Japan, on the other hand, "has been
performing far below its potential for a decade," he wrote.
As for China, Japan continues to fuel development by providing capital for
investment and a market for Chinese exports. "From the standpoint of
China's economic development, we need to see an early Japanese recovery,"
says Jiang Xiaojuan, economist at the government-backed Institute of
Finance and Trade in Beijing.
Almost daily, Japanese officials are giving the yen a verbal nudge
downward. The currency is now at 130 per dollar, 9.5% weaker than in
September and off 28% from the 101-per-dollar level it hit in January 2000,
during Japan's last, short-lived recovery. That's rendering Japanese
products cheaper overseas and imports more expensive in Japan.
There are early signs that the strategy is working, and that Japan may be
heading for a mild, export-led upturn. Japan's trade surplus soared a
seasonally adjusted 56% in March from February to 1.056 trillion yen ($8.1
billion), the government said this week, as exports rebounded and imports
fell, a trend Japanese officials attributed to the currency swing.
The trade windfall is trickling into Japan's domestic economy. Industrial
production rose 1.2% in March from a month earlier. Deflation, which has
led to near-record numbers of business bankruptcies and added to the bad
loans crushing the banking system, shows tentative signs of easing. The
wholesale price index fell 1.3% in March, improving from a drop of 1.4% in
February and 1.5% in January.
The optimists say Japan could begin growing again later this year, and even
those who are frustrated by Japan's long resistance to reform say the very
worst may be ending. "Japan is beginning to show signs of stabilization as
a consequence of the fact that the U.S. and Europe are beginning to firm,"
Federal Reserve Chairman Alan Greenspan told Congress last week.
In Need of a Lift
Japan badly needs a lift. Standard & Poor's last week downgraded the
country's government bonds to the same level as those of Cyprus, citing a
soaring national debt and wobbly banks. The International Monetary Fund
predicted Japan's economy will shrink 1% this year, in spite of the
improving export outlook.
"Given Japan's weak fundamentals and given the recovery of the U.S.
economy, it is only natural for the currency to depreciate," says Eisuke
Sakakibara, former Japanese vice minister of finance. "Objective analysis
indicates that you may be headed to 150 or 160" yen per dollar. Most
private economists see a more modest shift, with the yen trading as low as
140 per dollar by the end of this year. (The higher the number of yen per
dollar, the lower the yen's value.)
A parade of U.S. officials, including Mr. O'Neill, have publicly snapped at
Japan to push ahead with reforms and not rely solely on exports to recover.
Privately, Bush-administration officials say they know the yen may weaken
further. Officials say they wouldn't be too unhappy if yen softness is the
result of tough reforms, such as the inflationary monetary policy Japan's
central bank is pursuing, or more aggressive action on the banking problem.
A decade ago, U.S. policy makers would have balked at lending a hand. Japan
bounced back from World War II thanks to strong exports on the back of a
weak yen, which Gen. Douglas MacArthur pegged at 360 yen per dollar. This
made Japanese toys and transistor radios dirt-cheap in dollar terms for
years. By the 1990s, the yen had strengthened to about 125 per dollar, but
Japanese firms had gone high-tech. They wiped out the U.S.
consumer-electronics industry and were whipping America's semiconductor and
car makers. Some in the U.S. government thought a yen appreciation would be
good for America, making U.S. goods cheaper in yen terms and opening up
closed Japanese markets. With markets doubting the solidity of the U.S.
economy and the Clinton administration's willingness to defend the dollar,
the yen soared, briefly touching 79 per dollar in 1995 and ravaging Japan's
These days, Japan's gain from a weak yen might not cause much pain abroad.
Japan gets a 0.3-percentage-point boost to its gross domestic product in
the year following a 10% yen depreciation, estimates economist Donald Hanna
of Salomon Smith Barney. The U.S. and China, he calculates, lose just 0.1
percentage point of growth.
The impact is blunted because Japanese companies don't compete all that
directly with U.S. and Chinese rivals anymore. C.H. Kwan of the Research
Institute of Economy, Trade and Industry in Tokyo found that, of 10,000
manufactured goods imported into the U.S., Chinese and Japanese producers
competed head to head on just 21%. Despite the yen's fall and Japan's
slump, two-way trade between Japan and China grew last year, and China
posted a $27 billion trade surplus with Japan.
Much of the fuel for this trade is coming from Japanese companies, which
are racing to produce everything from mushrooms to DVD players in China to
take advantage of steeply lower costs. Even a sharply weaker yen wouldn't
reverse that trend, because Japan's labor costs are 15 to 40 times those of
China. Toshiba Corp. last year expanded a sprawling plant in southeastern
China that will eventually produce 80% of the copiers Toshiba makes
world-wide. "China is now the backbone of our company," says Liu Yan,
spokeswoman for Toshiba's China operations.
In the U.S., the yen probably won't spark tensions in computers and
electronics, traditionally one of America's most sensitive trade areas with
Japan. That's because the two nations' leading companies don't go toe to
toe like they used to. Japan has lost competitiveness in key areas -- from
chips to software to large server computers -- and so can't use a weak yen
to sock U.S. companies that dominate these industries.
Where does the yen help Japan? The country still leads the world in some
electronics categories where the U.S. and China aren't a big presence. The
currency shift is giving a lift to exporters such as Canon Inc., which
makes copiers and digital cameras, and Olympus Optical Co., which is No. 1
in world-wide market share for endoscopes, expensive medical cameras that
allow doctors to peer inside of patients. That's because the companies'
dollar sales are worth more in yen terms. For consumer-electronics giant
Sony Corp., which garners more than 70% of its sales outside Japan, a
one-yen shift in the yen-dollar rate can erase or add eight billion yen in
annual operating profit, says Chief Financial Officer Teruhisa Tokunaka.
"The export business supported by the weaker yen is one of the very few
options that Japan now has to change the [economic] situation," says Mr.
Even in areas where the two nations do duke it out, the yen isn't always a
pure negative for America's industrial base. A weak yen is sparking a
pickup in Japanese auto exports to the U.S. at the expense of Detroit's
brands. But the Japanese for years have been plowing profit back into the
U.S., where they collectively built 2.4 million cars and trucks in 2001.
Nissan Motor Co. is investing $930 million to construct a plant in
Mississippi, where 4,000 employees will make pickup trucks, sport-utility
vehicles and minivans. By manufacturing cars in the U.S., Japanese
companies pay many of their expenses in dollars, thus undermining the
advantage of the cheap yen.
A weak yen can pose dangers, however. A wild card is Asia, where in 1997 a
weakening yen helped set off a chain reaction of devaluations, exacerbating
recessions that set off financial crises throughout the region. But a
falling yen would probably have a much more muted impact on the region than
five years ago, because countries are in much better financial shape, with
most having cut their foreign-debt levels and run up trade surpluses.
Another risk is that a weak yen might allow Japanese leaders to continue
avoiding the painful steps needed to truly fix their economy. Already,
calls within Japan for a banking-system cleanup, which were mounting a few
months ago in the recession's darkest hours, are tailing off. Instead,
Japan appears to be buying time with quick fixes. Stock prices soared in
late February and March, after authorities rushed through a curb on the
short-selling of shares.
Trade disputes could also erupt. The White House has been barraged by
complaints from manufacturers and lawmakers who say the dollar's strength
makes it tougher to export and to compete against imports. Car makers are
especially vocal. Ford Motor Co. President Nick Scheele says the weak yen
is giving his Japanese rivals the ability to offer better-equipped vehicles
for the same or less money, and pour funds into new plants and research
facilities, and new technology. Ford's complaint isn't so much the classic,
predictable gripe that the "foreigners" are simply undercutting prices.
They are "hugely profitable, to the tune of 25% to 30% more" than they
otherwise would be if not for the yen's recent slide, Mr. Scheele says. It
is "a competitive threat" that may hurt "a very significant slice of U.S.
But President Bush and Mr. O'Neill, despite their ties to big business,
have turned down every such pitch. Executives from Ford, General Motors
Corp. and DaimlerChrysler AG wrote a joint letter to the White House in
February asking for help with the dollar, prompting Mr. O'Neill's lecture
on international economics.
Mr. O'Neill, a former Alcoa Inc. chairman who also used to sit on GM's
board, believes well-run companies can work around currency fluctuations,
and governments shouldn't monkey around with exchange rates. The secretary,
of course, can more easily disregard the manufacturers' pleas now that the
U.S. economy is rapidly recovering from recession. The IMF predicts the
U.S. economy will grow 2.3% this year, up from 1.2% in 2001. The U.S.
merchandise trade deficit with Japan actually shrank 15% between 2000 and
2001, to $69 billion, according to Commerce Department data. As the U.S.
economy gains steam, the anti-inflationary effect of the strong dollar
again becomes a plus for the U.S., allowing the Fed to hold off longer on
any rate increases.
China has been complaining about the yen's weakness, brandishing a vague
threat about devaluing its own currency. But the jawboning aside, Chinese
policy makers and their advisers are keeping China's currency on its peg of
about 8.27 yuan to the U.S. dollar.
Underpinning the stand-pat policy is a sea change in Chinese thinking about
Japan. Though the Chinese leadership still routinely vilifies Japan in
public for its brutal occupation of China in the 1930s and 1940s, it sees
Japan as less of a potential strategic threat, due to its economic woes,
and more as a crucial investor and market.
Another reason for China's sang-froid is experience. It survived the
turmoil that devastated other East Asian economies in 1997-98, all the
while holding the yuan steady even as the yen fell to 146 per dollar from
115 in the space of a year. And the Chinese economy is stronger than it was
then: Loss-making state industries are turning around; state banks are
clearing off unrecoverable loans; foreign-exchange reserves are soaring.
All this argues that China might hold the line on the yuan -- up to a
point. Francesca Fornasari, foreign-exchange strategist at Lehman Brothers,
says that beyond 150 yen to the dollar, there is a 50% chance China would
adjust the yuan -- and the rest of Asia would likely follow. But she says
that even at 140 per dollar, China wouldn't be too concerned. China's stash
of foreign currency has been climbing, suggesting the yen's drop isn't
blunting China's export competitiveness.
-- Jason Singer and Norihiko Shirouzu contributed to this article.
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