‘Mr. Yen’ sees U.S. financial policy as behind the curve
He was known as “Mr. Yen.” As Japan’s deputy minister of finance for international affairs in the late 1990s, Eisuke Sakakibara had a stomach-turning insider’s view of an economic meltdown.
With Japan’s economy crushed by the collapse of a financial bubble, he became the champion of the low-yen policy. By intervening in currency markets to depress the yen’s value, the aim was to help marquee exporters such as Sony Corp. and Toyota Motor Corp. lower the cost of their goods abroad and generate more sales, thereby kick-starting a recovery.
A professor at Tokyo’s Waseda University, Sakakibara thinks the U.S. faces its worst financial crisis since World War II. In an interview, Sakakibara discussed the similarities between Japan’s 1990s collapse and the current U.S. situation, offering advice on how Americans might avoid a similar long-term nightmare.
Many people have drawn a parallel between conditions in the U.S. today and the implosion of the Japanese bubble in the 1990s. Do you agree with the comparison?
Yes. There are differences, but essentially they both began as non-performing asset problems in the mortgage sector. Japanese financial turmoil in the ‘90s started in the mortgage sector and spread to commercial banks and security firms. This is pretty much what is happening in the U.S.
Given your experience with this kind of crisis, what is the greatest danger facing American policymakers?
You tend to implement policies piece by piece, and you tend to be behind the curve. In financial markets, things spread very rapidly. So you have to overtake the speed of the markets, especially in a crisis when the speed really accelerates. In hindsight, we were always behind the curve. And although it may look like American authorities are moving very fast, they are also behind the curve.
When it comes to bailing out the financial services industry, have we passed the point of worrying about “moral hazard"-- that is, whether a rescue lets bad performers off the hook and encourages more risky behavior?
If you insist on moral hazard, you have to let all those financial institutions go down. That will eventually develop into systemic risk. You have to protect the financial markets at some point. The U.S. has come to the stage where authorities have to defend the financial system as a whole.
So a taxpayer bailout is inevitable?
I think it’s inevitable. In Japan, in the end, authorities had to do that. There was very strong resistance here as well, both from [parliament] and the general public. The American situation is very similar: There will be resistance from Congress and from the American people, because people, whether in Japan or the United States, simply don’t like the banks. They are the institution that lends you an umbrella when the weather’s fine and won’t lend it to you when it’s raining. But eventually we had to overcome that.
Could U.S. real estate go into the kind of prolonged decline that happened in Japan?
It’s possible. Sure, some kind of rapid reconstruction is also possible, but it’s possible that the U.S. may repeat what we experienced in the ‘90s.
With the benefit of hindsight, what advice would you offer American authorities in trying to contain this crisis?
Infuse public money as quickly as possible, in a very significant amount. How you do that depends upon the specific situation. Our political situation was quite different. Our financial markets are different. You have to do it in your own way. But the important thing is to do it very quickly and to do it in a very significant amount. Don’t put in public money bit by bit. A huge infusion at first.
In Japan, the worry now is a sharply rising yen; the dollar is now worth less than 100 yen. How strong will the yen get?
In real terms, the yen is still really cheap. Even at 99 or 100 yen to the dollar, it is equivalent to something like 130 yen 10 years ago because during the last decade, the inflation rate in Japan has been on average a little bit below zero, and the U.S. rate has been above 2%. The yen will probably reach the level of 90 very quickly and could even break 90 by the end of the year. Some people say it could hit 70.
Does Japan’s government have a breaking point at which it will intervene to depress the yen to help the exporters who drive the Japanese economy?
The days of Japanese authorities aiming for a weak currency are over. I think Japanese finance ministers should start to say that a strong yen is in Japan’s national interest. Ten years ago, I was trying to depreciate the currency. At that time, it was necessary. But there’s been a paradigm shift. Look at energy prices. Look at commodity prices. A strong yen helps Japan buy them more cheaply.
Japanese exports could compete at a reasonable strong yen level. Their profits will be reduced at first, but it’s a one-time shift. Sony, Toyota and Matsushita could still compete with [a yen of] 80 to 85 [to the dollar]. And 80 to 85 would help Japanese consumers greatly in terms of energy and food prices.
I’m just beginning to hold that view. And it’s a minority view. But times have changed. We need to shift our mentality.