Concerns Deepen Over Policy to Depreciate Yen
Flight attendant Naoko Kanbara has to keep a close eye on arrival and departure times and flight numbers for her job. One number she doesn’t like these days is 131-- the number of yen it takes to buy a dollar. The sharp weakening of her native currency in the last two weeks has suddenly made it a lot more expensive to buy anything overseas.
“I fly to San Francisco tomorrow, and seeing the yen above 130 is a real shock,” Kanbara said. “I’ll tighten my purse strings and spend less on food, especially in the U.S. where there’s also a 20% tip. I may end up eating in places where I don’t have to pay a tip, like takeout from a deli.”
Japanese overseas travelers aren’t the only ones worried these days. The Chinese and South Korean governments registered their protest with Tokyo in the last few days over Japan’s currency depreciation.
Their concern is that a cheaper yen makes it more difficult for their exporters to compete against Japanese counterparts, undermining their own industry. Further depreciation could prompt other Asian countries to counter with their own devaluations.
“If it goes much below 135, you’re going to see a lot of squealing,” said Garry Evans, a strategist at HSBC Securities.
Japanese policymakers see the move as a life preserver. By driving the yen down to the 130-to-135 range, they hope to make their own exporters more competitive--even at the expense of their Asian counterparts--reduce deflation and eventually breathe enough life into the moribund economy to achieve a business recovery and pull Japan out of its fourth recession in a decade.
One trouble with exchange-rate jiggering, though, is finding the brakes. It’s relatively easy for governments to make currency rates fall, at least over the short term, by guiding the market. This is done through hints and strategic comments by key officials, as Japan has done repeatedly in recent weeks.
It’s often far more difficult to halt a currency’s slide once it starts. Japan may think the ideal yen rate is around 135, but some economists believe it could fall as low as 180 within a year, undermining confidence in Japan’s broader economy.
“The interesting question is, do they think they can stop it?” said Richard Jerram, an economist at ING Barings.
Japan is betting that the weaker yen will give it some breathing room in the face of its many financial and economic problems, topped by its growing banking crisis. In the latest sign of trouble, regional Ishikawa Bank went bust Thursday after three straight years of losses. “This is the first of many such stories,” said Masaki Kanno, chief economist at J.P. Morgan Securities Asia.
A key question will be whether Japan uses the short-term relief provided by a weaker currency to put through the reforms it’s delayed for so long, or whether it continues its bid to muddle through. Japan has confounded critics for years with its unwillingness to take the tough steps many believe are essential--including the closing of bloated or inefficient factories, companies and banks that would almost certainly lead to more layoffs and a sharp political backlash.
Another question is how the rest of Asia will react to Japan’s latest gambit. South Korea is the most directly affected by a weaker yen, given that 45% of its export trade competes directly with Japan’s, so Seoul is expected to devalue its currency nearly in tandem. Taiwan could move relatively quickly as well.
“Japan’s been conducting a stealth depreciation,” said Kenneth Courtis, Asia vice chairman at Goldman Sachs. “At some point, Asian nations are going to respond.”
The worst-case scenario is that Japan’s move sets off a round of “me-too” devaluations that sparks another financial meltdown of the sort seen during the 1997-98 Asian currency crisis.
Most economists believe the odds of this happening are relatively low at this stage. Technology exports, a mainstay of many Asian economies, show signs of bottoming out. And many countries have more foreign reserves than they did three years ago.
Finally, changes put into place after 1998 make short-term currency adjustments easier in most countries, with the exception of China, Hong Kong and Malaysia, which still link their currencies to the U.S. dollar.
“Asian economies are probably a bit stronger than they were [in 1998,] the last time the yen hit 146,” said Robert Subbaraman, an Asia analyst at Lehman Brothers. “That said, they’re still quite fragile.”
Even if most other Asian countries devalue in line with Japan, the net result after equilibrium is reached is that the entire region becomes more competitive--at the expense of European and American competitors and smaller regional players such as Mexico, the rest of Latin America and Eastern Europe.
In the past, the Treasury Department was wary of Japan manipulating the yen down, given the pain this inflicts on U.S. auto-parts and steel makers and others that compete against Japanese firms.
The prospect of a U.S. recovery by mid-2002, further deterioration in Japan and falling Japanese trade surpluses, however, have made the Bush administration more willing to go along with the move in an approach some term “benign neglect.”
“The U.S. position is that they wouldn’t mind a weaker yen if it’s accompanied by real structural reform,” said Pieter Vanderschaft, a Hong Kong-based economist at Barclays Capital. “Personally I’m not very optimistic of reform happening soon.”
Japan has grabbed onto the exchange rate lifeline with such gusto partly out of desperation. “Japan wants a weak yen so bad they can taste it,” said Yasuo Goto, an economist at Mitsubishi Research Institute. “It’s run out of other options.”
With nominal interest rates around zero, there’s relatively little room for traditional central bank monetary measures. And with government debt at 130% of gross domestic product--the highest level among major industrialized nations--there’s little possibility of another public works spending spree or other fiscal stimulus to lift the economy.
Nor are consumers or companies in a spending mood as the outlook deteriorates. That leaves little else but the tried-and-true strategy of exporting their way out of trouble.
This time, however, more are questioning the strategy. In order to have buyers for those exports, Japan badly needs a U.S. recovery by the middle of next year. But that’s not a given.
Furthermore, the number of exporters who have moved their factories out of Japan to lower-cost overseas locations continues to rise. This means increasingly the weak yen cuts both ways. “More of Japan’s manufacturing industry is getting hollowed out,” said Issaku Taguchi, an economist at Toyo Trust Bank. “I really wonder how much impact a weaker yen will have.”
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Hisako Ueno in The Times’ Tokyo bureau contributed to this report.
