[Viewpoint] Yeah ... call Toyko first

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[Viewpoint] Yeah ... call Toyko first

Timothy Geithner can’t be happy.

The U.S. Treasury Secretary has worked 24/7 for 20 months prodding China to revalue the yuan. Even scant progress is vital as November’s congressional elections approach. Geithner can forget it after Japan’s intervention.

It’s a little-appreciated side effect of Japan’s first yen sales in six years. Any calls for China to boost the yuan will now be met with a blunt retort: Yeah, why don’t you call Tokyo first? Japan’s per-capita income is more than 10 times ours and you’re giving us grief about exchange rates?

It’s smiles all around in Beijing. China is growing 10 percent a year, Premier Wen Jiabao says efforts to avoid overheating are in “good shape” and investment is still pouring in. The glue holding it together is a cheap currency. Japan just gave China a green light to keep it that way.

Adding insult to injury, Japan’s intervention was confirmed on Wednesday, the day U.S. lawmakers began a two-day meeting to address China’s currency. And largely for nothing: Japan’s chances of driving down the yen in the long run are virtually nil. Not with the dollar and euro falling for very logical economic reasons.

“The U.S. can hardly brand China a currency manipulator while Japan is bulldozing the yen,” says Simon Grose-Hodge, a strategist at LGT Group in Singapore.

Japan’s example gives China extra ammunition to resist calls for action at a meeting of G-20 finance ministers in Washington next month. It’s the equivalent of a get-out-of-jail-free card. It’s also an incentive for officials in Seoul and Taipei to intervene to stem increases in the won and Taiwan dollar.

The yen isn’t representing global imbalances the way the yuan does. China should let the yuan rise, and not just disingenuously ahead of congressional hearings. It’s stunning that the yuan this week rose to the highest level since 1993. The key is for that trend to continue and accelerate after the gavel bangs.

China’s $2.5 trillion of currency reserves are more a sign of an unsustainable model than financial strength. When does China stop hoarding? When reserves reach $3 trillion? What about $4 trillion? Really, what an unproductive use of state resources. This cash glut also inflates China’s money supply, raising the risk of overheating.

Yes, an undervalued yuan makes it harder for troubled economies in the U.S. and Europe to boost growth. The reason China should act is because it’s in its best interest. It would raise purchasing power and allow officials to make better use of China’s savings.

China will move when it internalizes these benefits, not because Congress or Geithner demand it. Any hopes that it might happen sooner rather than later were dashed by the sudden return of Japanese intervention.

Prime Minister Naoto Kan is acting in what he believes to be Japan’s self-interest. There’s a clear every-economy-for-itself dynamic coursing through the world these days and Kan has both voters and opposition lawmakers to whom he must answer. It would have been better, though, for Kan to wait for broader support from G-7 members.

China’s economy recently surpassed Japan’s, and trade data show the extent to which Japan is benefiting from Chinese demand. In the long run, a stronger yuan would probably benefit Japan more than a weaker yen. Short-term thinking is winning out in Tokyo.

As Jesper Koll, Tokyo-based head of equity research at JPMorgan Chase & Co., points out, “Japan lives and dies with the yen.” And that’s just the problem. The perception among executives is that a strong yen equals bankruptcy. It would be better if they responded with innovation, increased productivity and a sense of sobriety.

By giving in to the business lobby, Kan’s party suggests that it’s devoid of fresh economic thinking. Unilateral yen sales were the bailiwick of the Liberal Democratic Party that controlled Japan virtually uninterrupted for 54 years until August 2009. Kan’s Democratic Party of Japan showed a decided lack of originality by intervening.

Worse, it sent the message that there’s nothing wrong with Asia’s obsessive approach to exchange-rate management. But there is. Every time officials in Seoul, Taipei or elsewhere act to hold down currencies, they are delaying the process of recalibrating growth models away from exports to domestic consumption. Global imbalances grow worse.

Policy makers in Malaysia, Thailand and the Philippines signaled recently that they may step in to limit volatility in their currencies. You can bet on it if Japan’s yen sales continue. Two years after the collapse of Lehman Brothers Holdings, Asia sees exports as the only game in town.

Such beggar-thy-neighbor policies will only get Asia so far. Everyone simultaneously wants to export their way out of trouble and can’t. This global race to the bottom will be of limited success.

For Geithner, Japan’s intervention is very poorly timed. The Obama administration is desperate to get some yuan-related points on the scoreboard ahead of November. That just became much harder thanks to events 7,000 miles away from Washington.


*The writer is a Bloomberg News columnist.

by William Pesek

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