Reversing strong yen is rhetoricPrime Minister Shinzo Abe’s “reversing strong yen trend” formula has given a long-awaited morale boost to the Japanese and industrial producers, spreading a spirit of optimism across the nation that the country may finally defeat deflation and shake decades of lethargy. The weak yen policy is being worshiped by entrepreneurs and politicians as a magic portion that could make all the country’s problems go away. They argue that the yen has been excessively overrated considering the weakness of its underlying economic performance and fundamentals. Japan’s economy is in such mess because of dead exports as the result of weak price competition. They believe a reversal in the yen strength would revive industrial activity, jobs and revenue.
They, however, see half of the picture and are not entirely correct. First of all, it may be arguable that the yen has strengthened too much over the years. They claim the U.S. dollar that traded at a 100 yen level before the global financial crisis in 2008 tumbled to 77.44 yen as of last September. But they neglected to consider price differences in the two countries between the two periods. It is how economists measure the real effective exchange rate: the weighted average of a country’s currency relative to a basket of other currencies adjusted after inflation.
According to the KDB Daewoo Securities’ analysis of a JP Morgan reading, the yen’s real value is at its lowest level since September 2008. It has fallen as much as 40 percent since 1995. The chart on real effective exchange indices by country on the Web site of the Bank for International Settlements makes a similar argument. The Bank of Japan also admits that the yen has not appreciated that much in real terms. To devalue the yen further would not be reversing the trend, but cheapening the currency. Former International Monetary Fund’s managing director Domnique Strauss-Kahn accused Japan of a beggar-thy-neighbor policy for forcibly attempting to bring down the value of the yen.
The argument that the Japanese economy is stuck in stupor due to a strong yen is also overblown. Even as it has been whining about a strong yen, the central bank has remained dovish on rates for nearly two decades. The belief that a cheaper yen would suddenly revive the boom days may stem from desperate wishful thinking rather from sensible economic reasoning. Skeptics point out that fueling a car with a broken engine would hardly make it go far.
But we are in no position to outright criticize Japan for resorting to politicization of currency to fix its economy. We, too, benefited from a weak currency. Foreign experts accuse Seoul authorities of hypocrisy for criticizing Tokyo’s foreign exchange policy. We may not entirely agree, but cannot deny that some might view it that way. In today’s globalized world, authorities cannot ignore foreign perspective and sentiment on setting the value of national currency. Hard-line bureaucrats sometimes call out for sovereignty in currency policy, but their argument cannot attract a consensus in an international context. We must come up with more sophisticated terms and rhetoric on the policy.
Abe placed Haruhiko Kuroda, former Asian Development Bank governor, at the top post of the Bank of Japan to spearhead ultra-loose monetary policy in sync with fiscal expansion because of the latter’s international experience and sensitivity in communicating with the foreign community. He is no aggressive champion of a weak yen. Like American billionaire investor George Soros, Kuroda has been an avid fan of Austro-British philosopher Karl Popper. He translated numerous works of Popper. He is also an expert on Greek philosophy and always had Aristotle’s works on his desk while working at the Japanese Ministry of Finance.
The bookish bureaucrat won’t likely settle for being a lap dog for Abe. He will likely use the foreign exchange rate to steer the economy toward the inflation target without losing face or delicacy. As a senior finance ministry official, he shrewdly avoided international criticism while spending billions of yen to prevent the currency’s appreciation. He referred to currency policy as a “beast that can only live in the gray zone between success, failure, uncertainty and hope.” He was confessing the gap between reality and goals while managing currency affairs.
He starts work as helmsman of Japan’s monetary policy this week. The central bank’s ability these days is often measured by its role in aiding the economy. We must ask about the role of our central bank. Is the Bank of Korea ready to compete with the sophisticatedly packaged easing policy of its Japanese counterpart? The inauguration of a new head at the Bank of Japan should be a wake-up call to the Bank of Korea.
*The author is an editorial writer of the JoongAng Ilbo.
by Nam Yoon-ho