Dangerous yen By Uwe Parpart Editor, Asia Times Online
As the yen keeps on weakening to the cheers of clueless Japanese politicians hoping for an export-led recovery and studied inaction by the country's central bank, Japan's neighbors are not amused.
Since late 2000, in two (December 2000/January 2001 and December 2001/January) ratchet moves, the yen has lost about 21 percent against the US dollar. This controlled devaluation, which economic ministers say merely reflects market fundamentals, has done little for Japanese growth: Exports account for just 10 percent of GDP. But as the yen slide continues from the present 133 toward 140 to the dollar, it is continuing to erode the export competitiveness and growth potential of other Asian economies whose export dependencies range from China's 25 percent to Korea's 45 and Southeast Asia's more than 50 percent.
The sharpest recent reaction has come from China. In an early February article in Beijing's Jingji Ribao (Economic Daily), central bank vice governor Li Zaohang wrote that China should devalue its currency when necessary to ease pressure on economic growth arising from difficulties in expanding exports. Similar warnings, to be sure, have been issued before. But this one is different and no longer accepts "market fundamentals" double-talk.
Yen devaluation is not a short-term phenomenon, Li notes. Instead, "behind it lie stronger long-term economic motives" to achieve three goals: "shifting the pressure of the US recession on the Japanese economy to Southeast Asian countries and China, which are Japan's competitors in exports; preventing the euro from challenging the dominant positions of the US dollar and the yen; and weakening the internal drives for China's economic growth by shrinking its external space". In conclusion, Li urged the central bank to adopt a more flexible exchange rate system.
That's tough talk. And while Japan may not be as concerned about the role of the euro as Li thinks, the gist of his charges is correct. Japan is showing precious little concern for the geese struggling to stay aloft in its turbulent wake in the once proudly proclaimed East Asian flying geese development pattern. As for China, containing rather than assisting its growth is a not-so-new, but ever more urgent Japanese preoccupation.
Not only China is concerned. South Korea is as critical of Japanese attempts to substitute beggar-thy-neighbor policies for domestic reform. About two-thirds of Korean export goods directly compete with Japanese products in foreign markets, especially in the automobile, shipbuilding, steel and electronics sectors. According to the Korea International Trade Association, a 10 percent depreciation of the yen tends to cut Korea's annual exports by US$2.7 billion (1.7 percent) and imports by $800 million, resulting in a $1.9 billion loss in trade balance.
Now let's suppose that - as the yen keeps on sliding - China and Korea devalue. Southeast Asia, which directly competes with China in numerous product categories, will then have no choice but to do the same. Japan will successfully have exported currency volatility and chaos to the rest of Asia, weakening at the same time the 1997 crisis economies' ability to service their dollar-denominated debts and saddling them with higher inflation and interest rates. "All told, a sharply weaker yen is unambiguously bad for the economies in Asia ex-Japan," Lehman Brothers said in a recent report.
Even for Japan, however, there is more bad news than good, especially in the longer term. Some of the country's economists are convinced that the only way to crush deflation is to push the yen lower, thus raising import prices and changing people's expectations. But that's a myopic view. Deflation is not just a Japanese phenomenon, it's global in nature. In the fourth quarter of 2001, even the US GDP deflator turned negative (-0.3 percent) for the first time in its 42-year history, and over the same period the consumer price index and the price of gold were at or near their lowest levels since 1990. The global deflationary trend is not principally due to weak demand or a monetary phenomenon as such; it is imparted on the world economy by the massive and - as US Fed chairman Alan Greenspan stressed recently - continuing productivity gains derived from the large-scale introduction of information technology in the 1990s.
Japan's import prices might rise briefly as a result of the yen's depreciation, but will quickly adjust again. Meanwhile, the weak yen will tend to protect the least efficient producers and once again postpone the necessary shake-out of the unproductive domestically-oriented sectors of the economy. Instead, Japan should stop worrying about deflation as such, aggressively deregulate, and engineer a high-tech driven shift out of manufacturing - much as occurred in the US economy over the past two decades when manufacturing employment decreased from 21 percent of total employment to just 12 percent today.
Under such circumstances, worries about competing for manufactured exports market share with China would soon be out of the window. Turnaround as well would be effected regarding Japan's most deep-seated problem: woeful returns on equity and investment. (ROE in Japan is just 2 percent, compared to 6 percent in Germany and 15 percent in the US). But tell that to ruling Liberal Democratic Party politicians! Even if per chance they understood it, they'd rather see some short-term gains and bitch about China any day.