New View of Japan Emerges As the Yen Keeps Dropping
By ROBERT A. GUTH, MICHAEL M. PHILLIPS and CHARLES HUTZLER
Staff Reporters of THE WALL STREET JOURNAL
With Japan's currency dropping like a stone lately, familiar howls of protest can be heard from some powerful players in the world economy.
In the U.S., the Big Three auto makers are complaining about the profit windfall that a strong dollar-weak yen combination gives the likes of Honda Motor Co. China's textile and electronics exporters are lobbying their government to guard their competitiveness by cheapening the yuan, a move that could plunge Asia into a new round of debilitating financial instability.
But what's most striking about this latest chapter in Japan's slow-motion economic collapse is an important shift in the way the world views Japan . For decades, when the yen has slipped too far, foreign policy makers have groused loudly about the unfair advantage it offered to Japanese companies. Now there's little of the usual protest from Washington and Beijing. Indeed, some Bush-administration officials have been saying privately that a cheap yen might not be such a bad thing, provided that the Japanese also embrace tough reforms. And the Chinese are showing no serious signs of weakening their own currency to counter the Japanese edge.
The reasons for this equanimity say a lot about the way the world has changed since the postwar years, when Japan seemed poised to swamp the rest of the world in a tide of cheap exports. Japan may still be the world's second-largest economy, but it's a badly wounded giant, so feeble that it's dragging everybody else down. If the country's wobbly banking system implodes, it could trigger a global recession. The U.S. and China in particular are desperate to see Japan regain its footing, and there's a growing sense that an export-led recovery may already be cutting the odds of a full-blown crisis. For instance, exports are starting to jump, giving a boost to the electronics industry, a mainstay of the Japanese economy.
Just as important, the pain inflicted on the U.S. and China by a soft yen is less than commonly assumed. World trade patterns have changed drastically in recent decades, as each of the three nations has focused on industries in which it enjoys a competitive advantage. In the case of Japan and the U.S., for instance, businesses in the two countries don't often compete head to head, outside of autos and a few other industries.
"The bottom line is I don't think [the yen] will have any significant long-term impact on us one way or the other," says Scott McNealy, chief executive of server maker Sun Microsystems Inc. "It might on Japan , but not on Sun Microsystems."
In a February letter to Big Three auto executives, U.S. Treasury Secretary Paul O'Neill laid out some of these themes. He rebuffed the industry's calls for a cheaper dollar, noting that the strong U.S. currency reflects the fact that America has performed "extremely well" and attracted foreign investment, driving up the dollar. Japan , on the other hand, "has been performing far below its potential for a decade," he wrote.
As for China, Japan continues to fuel development by providing capital for investment and a market for Chinese exports. "From the standpoint of China's economic development, we need to see an early Japanese recovery," says Jiang Xiaojuan, economist at the government-backed Institute of Finance and Trade in Beijing.
Daily Nudge
Almost daily, Japanese officials are giving the yen a verbal nudge downward. The currency is now at 130 per dollar, 9.5% weaker than in September and off 28% from the 101-per-dollar level it hit in January 2000, during Japan's last, short-lived recovery. That's rendering Japanese products cheaper overseas and imports more expensive in Japan .
There are early signs that the strategy is working, and that Japan may be heading for a mild, export-led upturn. Japan's trade surplus soared a seasonally adjusted 56% in March from February to 1.056 trillion yen ($8.1 billion), the government said this week, as exports rebounded and imports fell, a trend Japanese officials attributed to the currency swing.
The trade windfall is trickling into Japan's domestic economy. Industrial production rose 1.2% in March from a month earlier. Deflation, which has led to near-record numbers of business bankruptcies and added to the bad loans crushing the banking system, shows tentative signs of easing. The wholesale price index fell 1.3% in March, improving from a drop of 1.4% in February and 1.5% in January.
The optimists say Japan could begin growing again later this year, and even those who are frustrated by Japan's long resistance to reform say the very worst may be ending. "Japan is beginning to show signs of stabilization as a consequence of the fact that the U.S. and Europe are beginning to firm," Federal Reserve Chairman Alan Greenspan told Congress last week.
In Need of a Lift
Japan badly needs a lift. Standard & Poor's last week downgraded the country's government bonds to the same level as those of Cyprus, citing a soaring national debt and wobbly banks. The International Monetary Fund predicted Japan's economy will shrink 1% this year, in spite of the improving export outlook.
"Given Japan's weak fundamentals and given the recovery of the U.S. economy, it is only natural for the currency to depreciate," says Eisuke Sakakibara, former Japanese vice minister of finance. "Objective analysis indicates that you may be headed to 150 or 160" yen per dollar. Most private economists see a more modest shift, with the yen trading as low as 140 per dollar by the end of this year. (The higher the number of yen per dollar, the lower the yen's value.)
A parade of U.S. officials, including Mr. O'Neill, have publicly snapped at Japan to push ahead with reforms and not rely solely on exports to recover. Privately, Bush-administration officials say they know the yen may weaken further. Officials say they wouldn't be too unhappy if yen softness is the result of tough reforms, such as the inflationary monetary policy Japan's central bank is pursuing, or more aggressive action on the banking problem.
A decade ago, U.S. policy makers would have balked at lending a hand. Japan bounced back from World War II thanks to strong exports on the back of a weak yen, which Gen. Douglas MacArthur pegged at 360 yen per dollar. This made Japanese toys and transistor radios dirt-cheap in dollar terms for years. By the 1990s, the yen had strengthened to about 125 per dollar, but Japanese firms had gone high-tech. They wiped out the U.S. consumer-electronics industry and were whipping America's semiconductor and car makers. Some in the U.S. government thought a yen appreciation would be good for America, making U.S. goods cheaper in yen terms and opening up closed Japanese markets. With markets doubting the solidity of the U.S. economy and the Clinton administration's willingness to defend the dollar, the yen soared, briefly touching 79 per dollar in 1995 and ravaging Japan's competitiveness.
These days, Japan's gain from a weak yen might not cause much pain abroad. Japan gets a 0.3-percentage-point boost to its gross domestic product in the year following a 10% yen depreciation, estimates economist Donald Hanna of Salomon Smith Barney. The U.S. and China, he calculates, lose just 0.1 percentage point of growth.
The impact is blunted because Japanese companies don't compete all that directly with U.S. and Chinese rivals anymore. C.H. Kwan of the Research Institute of Economy, Trade and Industry in Tokyo found that, of 10,000 manufactured goods imported into the U.S., Chinese and Japanese producers competed head to head on just 21%. Despite the yen's fall and Japan's slump, two-way trade between Japan and China grew last year, and China posted a $27 billion trade surplus with Japan .
Much of the fuel for this trade is coming from Japanese companies, which are racing to produce everything from mushrooms to DVD players in China to take advantage of steeply lower costs. Even a sharply weaker yen wouldn't reverse that trend, because Japan's labor costs are 15 to 40 times those of China. Toshiba Corp. last year expanded a sprawling plant in southeastern China that will eventually produce 80% of the copiers Toshiba makes world-wide. "China is now the backbone of our company," says Liu Yan, spokeswoman for Toshiba's China operations.
In the U.S., the yen probably won't spark tensions in computers and electronics, traditionally one of America's most sensitive trade areas with Japan . That's because the two nations' leading companies don't go toe to toe like they used to. Japan has lost competitiveness in key areas -- from chips to software to large server computers -- and so can't use a weak yen to sock U.S. companies that dominate these industries.
Where does the yen help Japan ? The country still leads the world in some electronics categories where the U.S. and China aren't a big presence. The currency shift is giving a lift to exporters such as Canon Inc., which makes copiers and digital cameras, and Olympus Optical Co., which is No. 1 in world-wide market share for endoscopes, expensive medical cameras that allow doctors to peer inside of patients. That's because the companies' dollar sales are worth more in yen terms. For consumer-electronics giant Sony Corp., which garners more than 70% of its sales outside Japan , a one-yen shift in the yen-dollar rate can erase or add eight billion yen in annual operating profit, says Chief Financial Officer Teruhisa Tokunaka.
"The export business supported by the weaker yen is one of the very few options that Japan now has to change the [economic] situation," says Mr. Tokunaka.
Even in areas where the two nations do duke it out, the yen isn't always a pure negative for America's industrial base. A weak yen is sparking a pickup in Japanese auto exports to the U.S. at the expense of Detroit's brands. But the Japanese for years have been plowing profit back into the U.S., where they collectively built 2.4 million cars and trucks in 2001. Nissan Motor Co. is investing $930 million to construct a plant in Mississippi, where 4,000 employees will make pickup trucks, sport-utility vehicles and minivans. By manufacturing cars in the U.S., Japanese companies pay many of their expenses in dollars, thus undermining the advantage of the cheap yen.
Wild Card
A weak yen can pose dangers, however. A wild card is Asia, where in 1997 a weakening yen helped set off a chain reaction of devaluations, exacerbating recessions that set off financial crises throughout the region. But a falling yen would probably have a much more muted impact on the region than five years ago, because countries are in much better financial shape, with most having cut their foreign-debt levels and run up trade surpluses.
Another risk is that a weak yen might allow Japanese leaders to continue avoiding the painful steps needed to truly fix their economy. Already, calls within Japan for a banking-system cleanup, which were mounting a few months ago in the recession's darkest hours, are tailing off. Instead, Japan appears to be buying time with quick fixes. Stock prices soared in late February and March, after authorities rushed through a curb on the short-selling of shares.
Trade disputes could also erupt. The White House has been barraged by complaints from manufacturers and lawmakers who say the dollar's strength makes it tougher to export and to compete against imports. Car makers are especially vocal. Ford Motor Co. President Nick Scheele says the weak yen is giving his Japanese rivals the ability to offer better-equipped vehicles for the same or less money, and pour funds into new plants and research facilities, and new technology. Ford's complaint isn't so much the classic, predictable gripe that the "foreigners" are simply undercutting prices. They are "hugely profitable, to the tune of 25% to 30% more" than they otherwise would be if not for the yen's recent slide, Mr. Scheele says. It is "a competitive threat" that may hurt "a very significant slice of U.S. manufacturing jobs."
But President Bush and Mr. O'Neill, despite their ties to big business, have turned down every such pitch. Executives from Ford, General Motors Corp. and DaimlerChrysler AG wrote a joint letter to the White House in February asking for help with the dollar, prompting Mr. O'Neill's lecture on international economics.
Mr. O'Neill, a former Alcoa Inc. chairman who also used to sit on GM's board, believes well-run companies can work around currency fluctuations, and governments shouldn't monkey around with exchange rates. The secretary, of course, can more easily disregard the manufacturers' pleas now that the U.S. economy is rapidly recovering from recession. The IMF predicts the U.S. economy will grow 2.3% this year, up from 1.2% in 2001. The U.S. merchandise trade deficit with Japan actually shrank 15% between 2000 and 2001, to $69 billion, according to Commerce Department data. As the U.S. economy gains steam, the anti-inflationary effect of the strong dollar again becomes a plus for the U.S., allowing the Fed to hold off longer on any rate increases.
China has been complaining about the yen's weakness, brandishing a vague threat about devaluing its own currency. But the jawboning aside, Chinese policy makers and their advisers are keeping China's currency on its peg of about 8.27 yuan to the U.S. dollar.
Underpinning the stand-pat policy is a sea change in Chinese thinking about Japan . Though the Chinese leadership still routinely vilifies Japan in public for its brutal occupation of China in the 1930s and 1940s, it sees Japan as less of a potential strategic threat, due to its economic woes, and more as a crucial investor and market.
Another reason for China's sang-froid is experience. It survived the turmoil that devastated other East Asian economies in 1997-98, all the while holding the yuan steady even as the yen fell to 146 per dollar from 115 in the space of a year. And the Chinese economy is stronger than it was then: Loss-making state industries are turning around; state banks are clearing off unrecoverable loans; foreign-exchange reserves are soaring.
All this argues that China might hold the line on the yuan -- up to a point. Francesca Fornasari, foreign-exchange strategist at Lehman Brothers, says that beyond 150 yen to the dollar, there is a 50% chance China would adjust the yuan -- and the rest of Asia would likely follow. But she says that even at 140 per dollar, China wouldn't be too concerned. China's stash of foreign currency has been climbing, suggesting the yen's drop isn't blunting China's export competitiveness.
-- Jason Singer and Norihiko Shirouzu contributed to this article.
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Write to Robert A. Guth at rob.guth@wsj.com, Michael M. Phillips at michael.phillips@wsj.com and Charles Hutzler at charles.hutzler@wsj.com
Updated April 24, |
