A Message to Tokyo

If Japan tumbles, so would much of Asia, regions where U.S. investments and exports are starting to recover. With its own trade deficit at record levels, the United States needs a healthy Asia and a steady yen. That’s particularly significant for California, which sends 20% of its exports to Asia.

With this in mind, there was important news from Washington this week. The G-7 economic forum announced that the Bank of Japan had yielded to pressure from its rich global partners and decided to ease its monetary policy to stem the rise of the yen, which is threatening to unravel Japan’s economic recovery. But the Bank of Japan insists that it has not agreed to change its rigid monetary policy. The wording of the final communique from the world’s seven richest countries leaves ample room for interpretation, but it does not leave the Bank of Japan with the option of letting the yen appreciate.

Tokyo’s preferred way of stimulating domestic consumption--pumping more public money into the economy--has given the economy some life and, with it, a steep rise in the value of the yen, endangering further growth. Japan’s central bank is right in maintaining that manipulating exchange rates is not the ticket to prosperity. But it cannot disregard the yen exchange rate in setting its monetary policy.

The G-7 meeting has clearly recognized that the strong yen--which has risen some 15% against the U.S. dollar since July--is a problem not only for Japan but for the economies of the United States and other countries. For much of the 1990s, and up until last January, Japan’s economy had been either shrinking or bouncing off its low points. It has registered some growth in the last two quarters, but recovery remains fragile.

Japan must recognize that the strengthening of its economy depends on its own policies. The plan should include not only more government spending but also fiscal reform to stimulate investment by enterprises and vibrant capital markets. Raising the supply of yen by a more flexible monetary policy should be part of the formula.

The language of the G-7 finance ministers may have been oblique, but the message was clear: Tokyo must get its economic house in order.