Question: Now where did all that Nikkei money come from?
The implications of a reinflation and falling yen for both USA and East Asia should be obvious. For the USA, see below:
-Brad Mayer
>Subject: parting ways?
>
>[Interesting that the Nikkei responded lustily to the BoJ's
>loosening, while the U.S. market responded limply to the Fed's
>easing. Early signs of a role switch?]
>
>Wednesday March 21, 4:24 am Eastern Time
>
>Tokyo's Nikkei ends up 7 pct as market cheers BOJ
>(UPDATE: Recasts, adds details on autos, Aoki)
Washington Post Wednesday, March 21, 2001 Japan's plan to pump large amounts of yen into its banking system to encourage spending is presenting the Bush administration with a potentially thorny problem about the impact on the U.S. economy and industrial firms.
The White House and the Treasury have signaled their tacit approval of Tokyo's new policy of a "drastic monetary easing" announced Monday by the Bank of Japan. The administration's position was echoed by a number of private economists, who called the move a positive step toward recovery in Japan -- and thus a boon to the United States.
But representatives of American manufacturers were far more negative about the news because a surfeit of yen threatens to cause the Japanese currency to fall against the U.S. dollar, making Japanese goods cheaper and more competitive against U.S. products.
Therein lies the dilemma: The United States wants Japan to keep from slipping into a full-fledged recession, lest plunging demand in the world's second-largest economy exerts a dampening effect on other economies, including the United States'.
So U.S. officials favor the shift by the Japanese central bank, which instead of nudging interest rates up or down is aiming to substantially increase the amount of cash in the banking system. The central bank has indicated it will pump at least enough funds into banks to keep short-term interest rates at zero until the prices of goods and services in Japan -- which have been falling for the past two years at the consumer level -- reverse their deflationary spiral.
But if the yen starts to fall against the U.S. dollar, as many expect, howls are certain to erupt from American industry, which is already grumbling that Japanese and other foreign competitors enjoy an unfair advantage thanks to recent trends in currency markets.
"Most of us say, 'It's about time' and 'Hurray,' " said Alan Blinder, a Princeton economist and former vice chairman of the Federal Reserve. "A rising chorus of economists has been saying that the Bank of Japan should just be flooding the banking system with liquidity. There are a number of ways you can do that, and the BOJ seems to have pledged to do one of those."
The world economy is "going through a bumpy patch right now," Blinder added, "and it sure would be nice to see some growth coming out of Japan, so my judgment is this is good for the U.S. But it also stands to reason that this will cause the yen to depreciate, so if you're trying to sell autos in Japan, or competing against Toyota and Honda in the U.S., you may not be so happy about this."
Indeed, that concern is already evident. "We think the yen is plenty weak the way it is," said Frank Vargo, vice president for international affairs at the National Association of Manufacturers (NAM). He fretted that Japan is "trying to export its way out of its problems" instead of bringing about a more fundamental restructuring in its ailing banking system.
The yen has lost about 14 percent of its value in the past six months, hitting a 22-month low of about 123.5 yen per dollar earlier this week. The euro has also been falling sharply against the dollar in recent weeks. The decline in other nations' currencies, and the corresponding strength of the dollar, is seriously eroding the competitiveness of U.S.-made products, according to Vargo, who vowed to take the NAM's complaints, and those of several other manufacturers' associations, to Treasury Secretary Paul H. O'Neill.
"We're going to become more vocal," he said. "It's important for the Treasury to make a distinction between [its] strong dollar policy, which we support, and an overvalued dollar policy."
Another industry group troubled by the Bank of Japan decision is the American Forest and Paper Association. Maureen Smith, vice president-international, said: "This is clearly going to drive the yen down further. The Japanese make no bones about why they're doing a lot of this stuff -- it's to keep the yen at an export-competitive level."
The yen strengthened yesterday, and Japanese officials, including Bank of Japan Governor Masaru Hayami and Finance Minister Kiichi Miyazawa, have strongly denied that they are seeking a lower value for the currency.
Bush administration officials said they take those assertions at face value, and after Monday's White House meeting with Prime Minister Yoshiro Mori they continue to believe that Tokyo does not intend to rely primarily on exports for growth.
Some U.S. analysts contend that the Bank of Japan's move is not nearly as important as its own phrase -- "drastic monetary easing" -- suggests. "This could be a big break, if it's the prelude to a multi-part deal for really dealing with their problems, including writing off bad bank loans," said Adam Posen, a Japan expert at the Institute for International Economics.
Taken by itself, he said, "this ain't much of anything," because the Bank of Japan has technically committed only to keep overnight interest rates at zero for a while and hasn't necessarily pledged to flood the economy with yen.
"The bottom line is, the yen is going to go down either way," Posen said, whether or not Japan adopts a drastically expansionary monetary policy as part of a broader revamping of its economy. That's because if Tokyo fails to address the woes plaguing its banking system soon, "there will be a banking crisis, and money will leave Japan. So better the yen should go down first and help ease their problems, because anyone who thinks the yen is not going down is mistaken."