6 Aug 1999
Summers must come to his senses soon
By Anthony Rowley
U
S Treasury Secretary Lawrence Summers is renowned more for his intellectual skills than his diplomatic finesse but his performance during his first weeks in office has not impressed on either score.
He has put at risk Japan's tenuous economic recovery through his cavalier neglect of the US dollar, and arguably has put America's own economic boom in jeopardy.
The entire construct -- Japan's recovery and the trick-cycle act of US prosperity riding on a Wall Street boom -- is based upon the preservation of confidence on both sides of the Pacific. If confidence can be preserved long enough in the US for Japan's economy to begin functioning again as a growth locomotive, then the global economy may continue flying.
This was the unwritten understanding while Robert Rubin occupied the top slot at the Treasury and while Eisuke Sakakibara was Japan's financial vice-minister for international affairs. Both realised how critical the exchange rate factor is in this equation. Mr Rubin constantly extolled the virtues of the "strong dollar" whilst Mr Sakakibara weighed in with regular "verbal intervention" to keep the yen in check.
This implicitly accepted, if never explicitly stated, mutual understanding proved effective. The US has enjoyed an almost unparalleled period of prosperity, and a continuous bull market, while Japan's economy undoubtedly has begun to get back on its feet, albeit somewhat shakily.
Unfortunately, Messrs Rubin and Sakakibara departed the scene simultaneously last month just when this delicate balance was still poised to tip either way. Enter in their respective places Mr Summers (reputedly interventionist by nature) and Haruhiko Kuroda, Mr Sakakibara's former first lieutenant who has yet to assume the stature of his former boss.
The new Treasury Secretary is not renowned for indulgent attitudes towards Japan. No sooner had he assumed his new post than he was berating Japan for allegedly trying to export its way out of recession through a weak yen. It requires no great intellectual capacity to see that this is a grotesque over-simplification of what Japan was trying to achieve. What Japan needed above all was to stabilise the yen-dollar rate, so that it could take a benchmark against which to measure the progress being made in reducing costs and improving competitiveness.
Progress has been made on both of these fronts, and more is essential if Japan is to cease haemorrhaging outward foreign investment and to start attracting much-needed inward investment. Yet this benchmark can be swept away almost overnight by a bout of "endaka" (yen strength), leaving the economy back where it started when Prime Minister Keizo Obuchi's government began the painful task of economic restructuring last year.
By dint of the unspoken understanding between Messrs Rubin and Sakakibara, the yen-dollar exchange rate remained stable at around 120 for the first half of 1999. But it has plunged into turmoil since they quit the scene, with the yen soaring to around 114 and seemingly headed higher.
Mr Summers has voiced impatience with Japan's progress on deregulation and he appears intent on using the exchange rate weapon to accelerate it. The Treasury Secretary this week dismissed the entreaties of Japanese Finance Minister Kiichi Miyazawa for joint intervention to cap the yen's rise. He made a perfunctory gesture of saying that a strong dollar is good for America but then promptly declared that exchange rates "cannot be managed". This is not only disingenuous; it is dangerous.
The Tokyo stockmarket has already taken fright and unless Mr Summers comes to his senses soon, it seems likely that the still-fragile consumer and investor confidence in Japan will evaporate. It is difficult to see then how the Japanese economy could avoid sliding back into recession, no matter how much more fiscal stimulus is applied, and Asia would be drawn down into the vortex with it.
What of the US economy? The US is now running a public-sector surplus, as Mr Summers likes to point out, and is no longer so dependent upon Tokyo to help pay its bills. But the risks of allowing the dollar to slide against the yen (and against the euro) are much greater than simply a deterioration in Japan-US monetary relations. A weaker dollar will add to imported inflation in the US, especially now that oil and other commodity prices are rising. It will cause foreign investors to hesitate over further purchases of US securities, and possibly prompt them to liquidate some existing holdings. It could trigger a Wall Street collapse, and then all Mr Summers' brave talk about a US economy made invulnerable by restructuring and high productivity would be seen as hot air. The term is fitting since the US economy is now displaying classic symptoms of a bubble, kept afloat more by confidence and hubris than by fundamentals. If Japan's reflation is thwarted before the air is allowed to escape from the US bubble, we may all have to man the lifeboats.
The writer is BT's Tokyo correspondent
|
