China can take lessons from Japan economy
Article Last Updated: 06/26/2005 02:57:01 AM
IT'S Asia's most exciting economy, featuring double-digit growth, audacious industrialization, mass migration from villages to cities and per-capita income approaching $1,300. Soon it will even host the Olympic Games, the ultimate coming-out party for a developing nation.
If you think we are talking about China, think again. The reference here is to Japan — on the eve of the 1964 Tokyo Olympics. It's a reminder that, in many ways, Japan has been where China is today, and that Asia's No. 1 economy still has a thing or two to teach the region's No. 2.
On the issue of currencies, for example, Goldman Sachs (Japan) Ltd. Chief Economist Tetsufumi Yamakawa thinks Japan's experiences offer a few lessons for officials in Beijing. Each leads to the same conclusion: the sooner China revalues the yuan, the better.
That's at odds with China's stance, of course. Officials in Beijing have been very consistent on the yuan issue. Their message: We will alter our 8.3 peg to the dollar only when we feel the economy is ready. Translation: Don't hold your breath.
After bungling the issue, U.S. Treasury Secretary John Snow has begun applying some economics to it. He's now reading from the same script as Federal Reserve Chairman Alan Greenspan, who argues China will have to revalue to maintain control over inflation pressures and its economy.
And that's more or less what Goldman Sachs' Yamakawa thinks Japan's past missteps can teach China. Here are three specific lessons.
First, artificially keeping a country's exchange rate undervalued increases exports in the short run but has negative side effects in the long run. They include accelerating inflation and an increase in external imbalances like a rapidly growing current-account surplus.
Second, the risk of a big, destabilizing exchange-rate correction increases. The cost of letting external imbalances grow and inflation increase with each passing year rises because currency swings will eventually grow larger.
Third, the chances of all this translating into price and economic volatility may increase, thanks to poor fiscal and monetary policies. In other words, the bigger these imbalances get, the harder it will be for the normal
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policy-making tools to address them.
A key reason the U.S., Japan and Europe failed to prod China to boost the yuan is that arguments for such a move have been more political than economic. Politicians approached it as an issue of fairness, as if poverty-plagued China were conspiring to hurt wealthy consumers from Tokyo to Miami with a cheap currency.
China isn't budging, fearing its fragile financial system isn't ready for a less competitive currency. Yet it's hard to find an economist who seriously thinks China shouldn't revalue in the next couple of years, if even just slightly. And while China has withstood global pressure thus far, it's not clear how long it can continue to do so amid threats of trade wars.
Japan, for all its successes, offers China many examples of what not to do economically. China should avoid Japan's penchant for bailing out loser companies that can't compete globally — a practice Japan only now is abandoning. It should avoid the urge to solve all of its problems with government debt sales. That has left Japan with a credit rating lower than Botswana.
The world's most populous nation also should avoid the trap of export dependence, something Japan hasn't. While exports are an obvious way to boost growth and create jobs today, China must turn more attention to developing sources of domestic demand that can trump the need to rely on overseas markets tomorrow.
Chinese inflation isn't yet running out of control; it's expected to come in between 3.0 percent and 3.5 percent this year. Yet there are reasons to fear inflation pressures may worsen. There's also little hope imbalances like property bubbles caused by hot money flowing into China's economy can be controlled anytime soon. Here, Japan's experience is worth considering.
William Pesek Jr. is a columnist for Bloomberg News.
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