Japan best brace itself for the euro
By HIROSHI YAMAGIWA
Staff writer
Eleven of the 15 European Union countries unified their currencies into
a new single currency, the euro, today.
It will be used only on the books until January 2002, when euro cash
enters circulation. But the prospects of integration have already been
affecting economic activities in and outside Europe. The euro zone is
expected to incorporate not only Britain and the remaining EU states
but Eastern Europe in the future.
This may radically change the world's financial landscape.
Koetsu Aizawa, professor of economics at Nagasaki University, says
Japan faces tough economic challenges from the euro economies.
Aizawa, a member of the Economic Planning Agency's advisory group
on the European monetary integration and author of several books on
the issue, argues that Japanese industries have to consolidate to
compete with their counterparts in Europe and the United States. In an
interview, he discussed implications of the single currency. The following
are excerpts:
What is the biggest advantage the euro brings to Europe?
It will help complete the economic integration of Europe, which has
formed a customs union and then a single market (the free movement of
goods, people, services and capital within the region).
The euro makes a common currency area that can match the U.S.
Without the currency integration, each European country could not
survive the international business competition and keep its living
standards from falling. European firms could not beat their Japanese
counterparts.
The monetary integration greatly reduces costs for businesses in the
area, because they need to bear fewer transaction costs and no foreign
exchange risks. They can relocate their factories to, say, Spain or
Greece, where they can operate relatively cheaply.
Meanwhile, financial institutions will see lower profits, by 10 percent to
20 percent in some estimates, because they cannot earn foreign
exchange commissions. Yet the unified market is a big advantage for
them. As the issuance of euro-denominated bonds expands, they can
benefit tremendously from the increasing liquidity.
How will the euro compare with the dollar, which has so far accounted for some
60 percent of the world's foreign exchange reserves and 50 percent of
international trade?
I believe the euro will eventually match the dollar. So far, the dollar has
been the only global currency. But the deutsche mark has been widely
used in Europe since the 1980s, and the euro will now take over its role
as the region's single currency.
By simple arithmetic, the economic size of the euro-11 rivals the U.S.
(Of the world's gross domestic product, the euro-11 account for 19
percent, the U.S. 20 percent and Japan 8 percent).
If the European Central Bank maintains sound monetary policy and
member countries keep their budget deficit below 3 percent of GDP as
stipulated by the euro pact, the euro may become a stable currency. If it
does, it could account for 30 percent of the world's foreign currency
reserves, whereas the dollar's share could go down to about 50
percent. In financial transactions, the euro could become just as
dominant as the dollar. It is much more liquid than the mark if the new
currency accurately reflects the EU's economic size.
How does that affect the position of the yen?
Asian countries will probably use the euro extensively for political and
economic reasons, though they will still continue to use the dollar as
well. As a result, the yen will probably be used less and less in Asia. So
there is a possibility that Tokyo, which is considered one of the three
financial centers in the world (with New York and London), will
become a mere local market -- if no preventive action is taken.
If the yen is used less, that would decrease the benefits for Japan's gains
in financial markets and expose Japanese firms to more foreign
exchange risks if they cannot transact in yen.
So the euro is bad for the Japanese economy, if anything?
It is a negative factor, especially as the competitiveness of European
firms rise. They compete hard to sell products in 11 countries just like
one country. Already there has been a lot of realignment going on in the
manufacturing and financial sectors, as we saw in the merger between
Daimler-Benz (of Germany) and Chrysler (of the U.S.). This occurred
because of the monetary integration.
Japan's manufacturing sector still has the strength to compete
internationally, and it can also take advantage of the integrated
European market to sell goods. But there is little hope for the financial
sector. It is too late. Major Japanese banks are even withdrawing from
their overseas operations when (European) banks are advancing
abroad, such as into the U.S.
What should Japanese firms do?
Manufacturers need to realign themselves but maintain the good aspects
of Japanese business practices, such as lifetime employment. They
should consolidate by forming holding companies. Hitachi, Ltd., for
instance, should turn its divisions into independent firms under a holding
firm.
As for banks, let them fail. There are 18 major banks, which is too
many. (Nippon Credit Bank, one of the 18, was deemed insolvent and
placed under state control in December). There should be only five at
most, and preferably three. Reduce the number by letting them merge,
inject 30 trillion yen to 40 trillion yen in public funds into them and sell
off their bad loans.
Then there are two options. One is to form financial holding companies.
One possibility is an investment banking group combining Industrial
Bank of Japan, Nomura Securities Co. and Sumitomo Bank.
The other option is to permit universal banks, which can handle all sorts
of financial business, including securities business. They should buy big
foreign banks, because a Japanese bank alone cannot compete abroad.
What role should the government play?
As a matter of course, the government must lift regulations in the
financial markets so Asian countries can use the yen conveniently for
foreign currency reserves, settlements and financial transactions.
Another thing is -- I know this is an unusual idea -- Japan should form
an Asian Union with China and Singapore or a broader Asian region.
To make all of Asia prosper economically, selected Japanese industries
should be transferred to other parts of the region. That is the way Japan
can form a yen bloc and survive international competition.
Before that, Japan should remember how the Germans took
responsibility for what they did during the war. China and South Korea
will never accept Japan unless it demonstrates true soul-searching.
What would be the scenario for a euro failure?
If the economy worsens significantly, Italy and Spain, for example,
might increase the issuance of government bonds to shore up their
economies. That could prompt the new European Central Bank (which
is responsible for monetary policy in the euro zone) to cut interest rates,
leading to a devaluation of the euro and subsequent inflation in the area.
If the inflation gets out of hand, Germans might say no to the euro and
demand a return of the mark. They could then leave the Maastricht
Treaty (which in 1991 set the path for a comprehensive European
integration), although there is no such provision in the treaty.
But I don't think this scenario is likely and I hope not.
What is the main focus of the euro's debut in 1999?
It is whether the European Central Bank can carry out adequate
monetary policy, independent of political pressure.
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