Interview/Akio Mikuni: Japan's surplus is backfiring on its economy
asahi.com
02/17/2006
By MANABU HARA, Senior Staff Writer
The world's largest creditor, Japan, has been going through economic hardship, while the world's largest debtor nation, the United States, has enjoyed an economic boom.
Many Japanese have long wondered why the nation with the biggest surplus suffers from poor economic performance while the country buried in debt enjoys such a brisk economy.
In his recent book "Kuroji Bokoku" (Japan's self-ruinous surplus), Akio Mikuni, president of leading independent bond-rating agency Mikuni Co., concludes that the relationship between the two countries is similar to that between Britain and India in colonial times.
The more Japan's surplus accumulates through exports, Mikuni argues, the more the United States can reap the economic fruit raised by Japan Inc., swallowing up American dollars earned by Japanese exporters.
As long as this mechanism stays in place, an increase in export growth will always add deflationary pressure, even if it temporarily disappears.
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Q: You point out in your recent book that the current deflation, though weakening, stems partly from the nation's huge current account surplus, and that deflationary pressure will remain unless Japan substantially cuts its surplus to achieve domestic demand-led growth.
A: Japan's excess current account surplus is due to the fact that the money earned by Japanese exports does not flow into the Japanese financial market. Japanese exporters ask Japanese financial institutions to convert their dollars into yen to pay wages and invest more. But the banks, which purchased the dollars, just hold on to them, to lend or invest in dollar-denominated financial products. Thus, the exchange rate is stabilized to encourage exports.
What this means is that Japan's surplus, in the end, is basically held on the U.S. market, and does not flow into Japan. Thus the United States is able to use this money to stimulate its economy while expanding its huge deficit.
As a result, the currency in circulation on the Japanese market never increases enough to lift the Japanese economy, thereby causing deflation. As long as this mechanism exists, deflationary pressure will always emerge even if it temporarily disappears.
Q: Japanese companies have enough cash and do not want to borrow money from banks. But you think that funneling the surplus into the Japanese market would improve the economy. Why?
A: There is a misunderstanding in Japan about the relationship between surplus and monetary condition. It is believed that the money market loosens when Japan is in the black and it tightens when the country is in the red. But things are not actually so.
When Japan's current account is in the black, it is kept on the U.S. market. Therefore, the Japanese financial market tends to tighten. When Japan is in the red, the money market tends to be easy due to the inflow of money into the Japanese market.
People now say that the surplus is held on the U.S. market because there is excess liquidity on the Japanese market and nowhere to invest domestically. But the reality is the other way around. When Japan is in the black, the BOJ has to implement an easy monetary policy because its surplus is not flowing into the Japanese market. There is no sufficient liquidity on the Japanese market. Otherwise, there is no reason for the BOJ to have such an extraordinary easy-credit policy as a zero interest rate and quantitative easing policy in order to support the strong dollar.
Q: In what way should the government provide a financial push for the economy?
A: The government should funnel the surplus to Japan, thereby transforming the country's economic structure, so that domestic rather than external demand leads economic growth.
The government usually tries to stimulate the supply side, helping the country's export industry. This policy ends up with a rise in surpluses.
But from now on, like the United States and Britain do, Japan should try to provide financial stimulus to the demand side such as the housing loan market. Public investment is not bad as long as it aims at developing social infrastructure related to the improvement of quality of life: parks, for example. Conventional investment intends to stimulate the production side.
Inviting direct foreign investment also may not be a bad idea to help transform the current economic structure. But it is possible to assume that many foreign firms are now buying Japanese firms using "Japanese money" generated by its surplus overseas.
Q: What would eventually happen to the world economy should Japan's surplus continue to expand and the U.S. deficit keep growing?
A: There would be a point where the current upward trend of the U.S. deficit and Japanese surplus would reverse.
It seems that Washington is now entering a phase in which it no longer finds it easy to allow the further expansion of the deficits that support its brisk growth led by domestic demand.
U.S. debt--including that of governments, firms, financial institutions and households--is enormous. Its ratio of debt to GDP now exceeds 300 percent, nearly the same as during the Great Depression.
Homeowners are the largest borrowers, taking advantage of the increasing collateral values of their houses. Yet the bubble of the housing loan market is nearing its end.
Japan, too, is approaching a turning point. It may soon no longer be able to continue increasing its surplus, so far sustained by keeping the yen weak. The central bank will not be able to print enough yen to buy dollars to maintain its ultra-easing credit policy.
Q: In what way is it possible for Japan to manage the reduction of its surplus without causing ruinous confusion to the global economy?
A: Japan's foreign exchange reserves have markedly risen since 1995, although not in the past two years. The increase shows the government's policy of maintaining a weak yen to support exports. Japan is phobic about a strong yen, which it fears would sap the economy.
But what the government should do, for example, is to freeze its foreign exchange reserves so as to refrain from converting yen into dollars. Meantime, Japan should withdraw its dollar-based overseas assets slowly, while simultaneously increasing imports. This will gradually push the yen to appreciate against the dollar.
To be sure, there is the risk of sparking wild speculation. Thus, Japan has to be very careful in its moves toward reducing its surplus.
But no matter what, in the international economic game played according to the rules of currency floating, Japan has already accumulated a huge surplus, and cannot avoid becoming a temporary loser.(IHT/Asahi: February 17,2006) |
