The yen’s stunning rally is prompting the usual stirrings in Tokyo.
Japanese Finance Minister Taro Aso warns, for example, about “one-sided” exchange-rate moves and that Tokyo is watching “with a sense of urgency.” In the currency world of winks, nods and secret handshakes, that’s code for “cool it, or we’ll pounce” with direct intervention that sends the yen sharply lower.
Similar signals are emanating from the Bank of Japan, which just a few years ago managed to weaken the yen to the tune of 30%. As Governor Haruhiko Kuroda gears up for a second term, he’ll be joined by dovish deputies Masayoshi Amamiya and Masazumi Wakatabe in efforts to halt the yen’s 6% advance so far this year. The fear is that the trend will deepen deflationary pressures and derail the country’s second-longest postwar growth spurt.
But what if Tokyo went the other way, welcoming the yen’s gains?Wouldn’t it be great, too, if the rest of Asia followed suit?
It’s heresy merely to ask these questions. And yet it’s no longer clear that Asia’s weak-currency doctrine is still viable.
To be sure, mercantilism helped propel Asia to today’s heights. Obsessively managing exchange rates helped growth stars from China to South Korea to Vietnam build domestic institutions and raise incomes. But now it’s doing more harm than good.
The strategy fuels manufacturing activity, but does nothing to stimulate innovation and generate jobs in services or knowledge-based industries – basically the areas Asia must develop to move upmarket.
Here, it’s worth exploring the experience of highly-developed Japan, whose model much of Asia used to get this far. Particularly since the late 1990s, the BOJ and Ministry of Finance have worked in lock-step to cap the yen, in order to boost growth and profits among exporters. In 2004 alone, Tokyo threw the equivalent of Indonesia’s annual gross domestic product at currency speculators.
In 2013, Kuroda turned the campaign up to 11. His first act as BOJ leader was to fire a monetary “bazooka” at markets, savaging the yen and catalyzing a powerful Nikkei stock surge.
The dark side is that Kuroda’s cash took the onus off Prime Minister Shinzo Abe’s team to restructure the economy. Why deregulate industry when the BOJ is pumping fresh energy into Japan Inc.’s arteries?Corporate boards felt less pressure to streamline and innovate. The economy as a whole felt less urgency to jump into the 21st century. Japan’s recovery, in other words, is based on monetary steroids, not an organic, self-reinforcing upsurge.
Abenomics learned the wrong lessons from Japan’s post-bubble- economy funk. The last 12 months, for example, have been a tale of two parallel economies. One is growing at a healthy clip and turning international investors’ heads. The other is embroiled in a series of quality-control scandals tarnishing the Japan brand. A weak yen undermines both.
The first narrative is devoid of income gains (real wages fell 0.2% in 2017). Corporate executives have been waiting to see the extent to which Abe loosens labor markets, cultivates a startup boom, cuts red tape and empowers women. Other than a few tweaks to corporate governance, Abe hasn’t achieved any significant reforms.
The second economy fed a culture of Japan Inc. cutting corners to boost profits as opposed to inventing new products and processes.
The parade of quality woes at Kobe Steel, Mitsubishi Materials, Nissan Motor, Toray Industries and others are a reminder that the insularity of the past remains a barrier to Japan Inc.’s ability to compete in the future. Weak exchange rates, simply put, are corporate welfare that warp incentives and ease pressure on executives to internationalize management.
Imagine if Japan, in 2004, had gone the other way and taken a page from Germany. Over the last 20 years, German companies embraced and harnessed strong exchange rates to retool production, move upmarket and protect wage levels.
It’s never too late for Japan, or the rest of Asia, to learn those lessons. Chatter in Tokyo, though, suggests Japanese officials are about to bail out complacent executives anew and stymie the reform process. Strategy rethink, anyone?