America Has Voted: Impact of New U.S. President on Asian Markets

January 29, 2009

Speakers:
Alicia Ogawa, Senior Advisor, Center on Japanese Economy and Business, Columbia Business School
David Resler, Managing Director and Chief Economist, Nomura Securities International, Inc.
Jeffrey Young, Chief Economist, Platinum Grove Asset Management, L.P.

Moderator:
Leslie Norton, Foreign Editor, Asia, Barron's

Co-sponsored by Nomura Holding America Inc., The Women's Bond Club of New York and Center on Japanese Economy and Business, Columbia Business School.

Susan Green, Principal of Bank of America and co-chair of the event committee of The Women's Bond Club, and Richard Wood, President of Japan Society, commenced the symposium with welcoming and introductory remarks. The speakers who followed were Alicia Ogawa, Director of the Program on Alternative Investments at CJEB (Senior Advisor to CJEB as of January 31, 2009) and Adjunct Associate Professor at Columbia University's School of International and Public Affairs; David Resler, Managing Director and Chief Economist at Nomura Securities International; and Jeffrey Young, Chief Economist at Platinum Grove Asset Management. Leslie Norton, Foreign Editor, Asia, at Barron's, introduced the speakers and moderated the discussion.

Professor Ogawa began by commenting on Japan's expectations of President Barack Obama. She said President Obama is quite popular and inspiring to the Japanese people, but they fear that his popularity in the United States and his political mandate may be short lived. There also exists some concern about how pro-Japan some of Obama's policies will be, particularly on matters of trade and North Korea. Professor Ogawa stressed that any enthusiasm for Obama in Japan is far outweighed by the deep pessimism about the country's own crisis of political leadership and inability to deal with daunting economic challenges and financial market turmoil.

Dr. Resler said the best thing Obama can do for Japan and Asia is to return the U.S. economy to growth. He said recent years have disproved the theory that the U.S. economy was becoming decoupled with the rest of the world. In the 1991 recession, the U.S. economy imported 21 percent of the goods it consumed; in the 2001 recession this figure was at 31 percent; now it is at 35 percent. He explained that when consumer spending in the United States drops, not only do Japan's and other Asian countries' exports to the U.S. fall, but their trade among each other declines as well. While Dr. Resler cautioned against a return to the extraordinarily high U.S. consumer spending of a few years ago, he said returning it to a sustainably positive number is critical to getting the global economy out of a recession.

Mr. Young drew a connection between Professor Ogawa's and Dr. Resler's remarks by noting that Japanese pessimism is partly rooted in the fact that they know their economy is coupled with the U.S. economy, and they are worried that U.S. policies will not be aggressive enough to avert a prolonged U.S. recession similar to Japan's lost decade. That many of the tactics being used by U.S. policymakers were tried by Japanese policymakers in the 1990s is not comforting to the Japanese, he noted. Mr. Young said one of Obama's challenges is to restore confidence in macroeconomic policies.

The speakers next addressed the Obama administration's exchange rate policy. Mr. Young said that despite Timothy Geithner's confrontational remarks aimed at China's alleged manipulation of the yuan, he did not expect any major changes in U.S. policy from the previous two administrations. He speculated that the recent tough talk by Mr. Geithner may be in anticipation that policymakers in Japan and Asia will devalue their currencies as a policy option of last resort to spur domestic growth if interest rate cuts do not work and fiscal policy is perceived to be constrained. Dr. Resler said he thought Mr. Geithner's remarks were ill advised given that at the time he made them there was yet to be any articulation of exchange rate policies by either side and because the U.S. has never before been so dependent on capital flows from China. This approach to China's yuan devaluation reminded Dr. Resler a bit of how the U.S. always conflicted with Japan over the value of the yen in the late 1980s and early '90s.

Professor Ogawa addressed Japanese perspectives on exchange rate policy and capital flows. While Japanese exporters are taking huge losses because of the yen's appreciation, she said many Japanese equate a strong currency with a strong nation despite the negative impact it is having on the economy. Further, she said that based on her conversations with people at the Bank of Japan (BoJ) and the Japanese Ministry of Finance (MoF), she is surprised that there is inadequate concern over the possibility that the era of the U.S. spending and Japan and China financing is over. She attributed this to overly optimistic expectations that Asia will respond to this new era by unifying its bond markets.

Given their broad agreement that the Japanese and Asian economies are coupled with the U.S. economy, the speakers weighed in on the effectiveness of the U.S. fiscal stimulus package--which had only passed the House of Representatives at the time of the symposium. Dr. Resler was unimpressed with the version passed by the House because he thought it lacked immediate stimulus. He said too much spending was allocated for long-term infrastructure projects that will not have a short-term stimulus effect. The grants to local and state governments should be enough to avoid major cuts that would be a further drag on the economy, but this too does not qualify as a direct or potent stimulus, said Dr. Resler. Finally, he said an opportunity was missed with the stimulus bill's tax credit, which, for many low-income workers, will not be received until 2010. Dr. Resler suggested a preferable option for getting money to people immediately would have been to cut the marginal tax rates on either Social Security contributions or income.

Mr. Young noted that many of the people currently arguing against fiscal policy in the U.S. point to Japan's large fiscal spending in the 1990s, which failed to prevent their long-term economic malaise and burdened the country with debt. However, he said the U.S. has the advantage of learning lessons from Japan's mistakes implementing fiscal stimulus. He highlighted three conditions for fiscal stimulus to be effective. First, it must be large enough to adequately offset the shortfall in private demand. He recommended erring on the side of being aggressive; however, he said there are political realities in the U.S. that make this infeasible. Second, he said fiscal stimulus must be sustained in order to encourage the private sector to continue investing, thereby maximizing the multiplier effect. Japan's fiscal stimulus policy was implemented in an on-again, off-again manner that inhibited its effectiveness, and Mr. Young said Mr. Geithner has acknowledged this lesson. Third, Mr. Young said fiscal policy must be coordinated with monetary policy. Again, this is a lesson learned from Japan, where open hostility between the MoF and the BoJ led to counterproductive policies. Mr. Young was confident that the key U.S. policymakers are committed to avoiding this mistake.

Professor Ogawa agreed that the need to coordinate monetary and fiscal policies is well appreciated in the U.S. She added that in Japan, tensions are once again high between the BoJ and the MoF, and the BoJ is subject to substantial bullying by the MoF. Professor Ogawa concluded by suggesting that there may also be worthwhile lessons for the U.S. to take from Japanese industrial policy--either in the way Japan dealt with its declining industries in the 1970s, or how, from 2003 to 2007, Japan created the Industrial Revitalization Corporation of Japan (IRCJ) to take over and restructure failing companies. She said that the problems facing U.S. industry, most notably the auto industry, cannot be solved by macroeconomic policies alone.

--Report courtesy of the Center on Japanese Economy and Business, Columbia Business School