[Opinion] Slacking Yen, Opportunity to Improve Product Quality

Japan has not been able to get out of the recession for the past ten years. Many reasons come to mind, but some of the more important ones are the ineffectiveness of currency and finance policies and the market assessment of Japanese banks being almost on the brink of collapse. While the U.S. has been building a new economic miracle, Japan`s economic growth came to a stop during the same time period and the country has not been able to heal its structural illnesses. This year, the Japanese economy recorded negative growth, sky-rocketing unemployment, and the Nikkei has fallen 25 percent below the highest number comparable to 12 years ago. A serious deflation has gotten worse and consumer spending icily frozen. Despite the 63 trillion yen package for insolvent credit, the current amount of insolvent credit is estimated to be 66 trillion yen. Seeing how the banks have only 14.5 trillion yen in net capital, it is only logical, perhaps, for international credit assessment bodies to depreciate Japan`s chain index. There seems to be little hope for Japan`s recovery for the time being.

Most recently, Japan is trying to take advantage of the free flowing international capital to implement a fixed price target as the basis for the currency credit policy. The policy aims to establish a fixed target rate for price increase by adjusting the currency credit supply in order to revive the economy suffering from deflation. Yet, no matter how much the supply of currency increases and depreciates interest rates, investment will not revive and Japan will remain in a state of liquidity.

The currency credit policy is useless under these circumstances. The course of action that has more clout right now is to make the central bank buy up Japan`s government bonds. If this does not yield expected results, it should buy up diverse assets such as stocks and real estate, raise the expectation for inflation. Of course, this method is a provisional measure that uses the public market, and constitutes a different approach from the traditional currency credit policy.

When the Japan Central Bank pursues an expanded credit policy, the value of the yen will become weaker. Yet, recent movements of the JCB indicates that it is focusing more on U.S. Treasury Department bonds rather than Japan`s. When the dollar fell after the September 11 attack, Japan immediately entered the foreign exchange market. The foreign reserves quickly increased and Japan Central Bank currently has over 400 billion dollars in reserves.

Although Japan has chosen to embrace a policy of free fluctuation exchange system, the Treasury Department actually holds all the decision-making power on policies for foreign exchange and is leading Japan`s participation in the foreign exchange market. Japanese policy makers appear to have put all of their confidence in exports as the sole course of action for reviving the economy.

Will the Japanese economy really revive by depreciating the yen? Although some economists think that it will, this approach becomes problematic once we consider the fact that participating in the foreign exchange market will bring about the depreciation of the yen, not the currency credit policy.

If, however, Japan still insists on pursuing exports as the only means at a time when the global market is in a period of general economic slowdown, this policy clearly intends to deprive neighboring nations of their wealth. Unlike Korea, if the Japanese yen falls in value, other Asian nations` currency will follow suit. The moment the yen fell in value, foreign investment in Korea immediately began to decrease. One reason behind the Asian financial crisis was the depreciation of the yen. It seems that depreciation of the yen is not only Japan`s problem, but may increase the risk of recurrent East Asian financial crisis.

The value of the yen and the won has shown similar characteristics in the past. Yet, it does not seem highly likely that continued depreciation of the yen will have a large impact on the value of the won when we consider the present move to adjust the national chain index in Korea. However, it would not be sensible to enter the foreign exchange market in order to depreciate the won artificially. For the time being, our export businesses should prepare themselves for fluctuating exchange rates and concentrate all their energy on managing the exchange risk. They will have to avoid relying on exchange but advance product quality improvement, strengthen marketing, and promoting competitive prices.

Wang Yunjong (Korea Institute for International Economy Policy, Department of International Macroeconomics and Finance)