Gareth Morgan, director of Gareth Morgan Investments
Last week’s move by the US Fed to cap the yen's rise was significant. Until then the Clinton administration had been quite happy to let the yen keep soaring thus putting market pressure on the Japanese government to “do something” about the structural impediments preventing reduction in their current account surplus. But last week’s change seemed to be an offer by the Americans that they would help control the yen if the new Japanese administration showed corresponding goodwill by dealing urgently with deregulation of their domestic markets.
The response from the new Prime Minister though has been a damp squib – no specific undertakings to facilitate higher Japanese household spending have been forthcoming. Instead, Prime Minister Hosokawa detailed the “difficulties” Japan faced and little else. Given that he is Prime Minister of an eight member coalition government – hardly a secure perch from which to dictate policy direction – Hosokawa could very quickly turn out to be a lame duck leader. The possibility of Japan back at the polls before the end of this year is not remote.
The important aspect of Japan’s entrenched recession and policy paralysis as far as NZ is concerned, is that it likely means that their imports will continue to slump and their trade surplus mount. As long as government subsidies there effectively keep their exporters in business – and at least one third of the rescue fiscal measures the last Japanese government enacted, were in the form of hand- outs to beleaguered corporates – then appreciation of the Yen will fail to both curb exports and stimulate imports sufficiently. Japan is New Zealand’s second most important direct trading partner. Its doldrums will impair our export performance.
A negative response to America’s gesture for co-ordinated currency policy, leads us back to yen appreciation being the only way the Japanese trade imbalance is being addressed. Since 1985 it has risen 90% on a TWI basis without having any impact. In real terms it has risen 51% over that period! Their productivity progress over the rest of the world hasn’t been that fantastic since 1985.
The exchange rate appreciation suggests that if the policies which are permitting Japanese producers to maintain their export prowess were removed, the subsequent unravelling of the Japanese wonder machine to its sustainable state, would have quite a deleterious impact on the world economy. An orderly adjustment is preferable, but the political inability of Japan to make the required changes is delaying this. The longer the delay, the higher the tightrope the yen must traverse, and the greater the chance of splatter when the wire eventually snaps.
The quicker Japan’s political system delivers a government able to effect deregulatory change, the sooner the risks of chaotic change will dissipate. Let’s hope they have as many elections as it takes to deliver this result by Christmas.