Recent Papers & Speeches

The Yen; Is Japan or China The Greater Priority
The International Economy, July 1998

@If I were the world's chief economic and financial strategist I would recommend a further weakening of the yen relative to the dollar and European currencies, until Prime Minister Hashimoto resigns. After that I would foresee a strengthening of the yen for the following few years.

@A weak yen might seem a good thing for Japan. First, it could boost exports and so help to offset weak domestic demand. Second, it would reduce the risk of a deflationary spiral in which falling prices would increase the real debt burden on companies. Third, it would lure new investment in Japanese equities and property, thereby helping to ease the problem in that area.

@In my judgement, however, this scenario ignores what will happen in the rest of the world. Even with a weaker yen Japanese exports may not increase, when there is an economic crisis in East Asia and slowing growth in the U.S. economy. Further, with a weak yen generating strong export pressure and reduced Japanese demand for imports, reconstruction of the East Asian economies would become more difficult. It would also lead to renewed pressure for protectionist measures in the U.S.

@East Asian currencies have recently devalued against the already weak yen and import prices are falling now in Japan. A cycle of competitive devaluation could lead to devaluation by China and from there, financial turmoil in the whole of Asia. That would have an adverse impact in America and Europe.

@So, a deliberate strategy to weaken the yen is unrealistic. For as long as Mr Hashimoto sees fiscal consolidation as his primary objective, a weakening yen and the economic difficulties that result will lead him on to resignation. The next LDP cabinet will then have no choice but to stimulate domestic demand by announcing, immediately, an expansionary fiscal regime. Then, in anticipation of a stronger yen, there will be massive capital investment flows into Japan and a reversal of the trend in the yen towards its PPP level.

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