What's Next? Change in Tokyo & the World Economy

October 3, 2011

David Hale
, Founding Chairman, David Hale Global Economics
Richard Katz, Editor-in-Chief, The Oriental Economist Report
Ann Lee, Senior Fellow, Demos; author, What the U.S. Can Learn from China (forthcoming)

Lyric Hughes Hale
, Co-Editor, What’s Next? Unconventional Wisdom on the Future of the World Economy

A panel of experts on economic and public policy issues met at Japan Society for a conversation on social, political and financial-system change in Japan and the global economy.

Writer and commentator Lyric Hughes Hale, who moderated the discussion, recounted the origins of What's Next? Unconventional Wisdom on the Future of the World Economy, an essay collection that she co-edited along with economist David Hale.

The essays, most of which were written by independent experts unaffiliated with financial institutions, offer perspectives that are proving to be "uncannily correct," she said. Eighteen months ago, when the Hales, a husband and wife team based outside Chicago, began planning the book, adoption of a Tobin tax on financial transactions would have seemed out of the question. Yet there are now serious efforts in the EU to impose a financial transaction tax on stock, bond and derivatives trades.

It's ironic that Japan, which since the Meiji period has assiduously pursued industrialization as a means of preserving its autonomy, now finds itself dependent on exports, panelist Richard Katz of The Oriental Economist Report remarked. During the financial crisis, Japan's GDP fell 10 percent; even with some signs of recovery, exports have fallen by 40 percent from pre-crisis levels, and the country's GDP is still down 6 percent. Compare the S&P 500 index on a given day with the performance of the Japanese stock market 13 hours later, and you'll see a correlation rate of 90 percent.

With the Lehman shock and its aftermath, and now the 3/11 earthquake, tsunami and nuclear plant breakdown, there is a genuine risk of a double-dip recession. More likely is an anemic 1 percent growth rate, which is "bad enough," he added.

Washington and Tokyo "seem to be in a race on who can have more gridlock," Mr. Katz said. Some 30,000 people have died and there is an ongoing nuclear disaster, but still the political scene is one of "boys playing in the sandbox." The LDP's goal is to bring the DPJ down and force early elections. Polls blame the DPJ for being unable to govern. With control of the upper and lower houses split between the two parties, bond legislation can't pass without the LDP's agreement—not a situation that galvanizes lawmakers to action. Ozawa, meanwhile, cares only about his own power, and is "like Shiva both creator and destroyer."

Lacking a strong standard-bearer, the DPJ at some point will undergo more splits, Mr. Katz concluded. There can be no political stability without economic stability, structural reform and a commitment to reform. Japan has no political institutions to do this, even though there are a handful of "radical" bureaucrats who would be disposed to pursue reform if they could. Reform will take happen eventually, but further in the future, not now.

Will China help lead the world out of recession? asked Ann Lee, a senior fellow at Demos, who earlier in her career spent 12 years as a credit derivatives trader. The leadership in China is raising interest rates and taking other actions to cool down the economy. Chinese consumers are buying more cars made by Chinese companies, so German auto exports to China are down. The rise in interest rates, including Shibor, will reduce China's GDP growth rate from 10 percent to around 9 percent, in her view, but won't result in a hard landing.

The plan is to shift to a more service-based economy, but this will take time and training. There are debates going on in China over how to respond to the financing needs of countries abroad. "China probably will do what Buffett did" in aiding Goldman Sachs at the start of the financial crisis in 2008: offer "a lifeline, but on extortionist terms," Ms. Lee said.

Debate begins today in the U.S. Senate on a bill to allow the imposition of import tariffs on China as a currency manipulator. Still, in a loosening of China's currency policies, holders can now exchange and deposit their RMB in London as well as in Hong Kong and Singapore.


Q&A with the audience followed:

What about the delinking of Japan and China—are Japanese companies now moving to China because of the 3/11 catastrophes?

Richard Katz said that Japan will develop stronger relations with China, but not necessarily China with Japan. "Japan is an important source of technology for China, but there are others. China is not acting dependent on Japan's good will, or on any other country's good will," for that matter.

China spends more on its police forces than on its navy, army and other military, Ann Lee pointed out. It's true that if you watch CCTV, you see constant reports on the Philippines, India and Japan, reflecting China's worry about Western intentions in the Far East and the possibility that the U.S. would use other actors to test out China's resolve in areas such as the oil reserves off the Senkaku/Diaoyutai Islands. Yet ultimately, internal affairs are more important than foreign affairs.

With $5 or $6 trillion a day in foreign exchange and the yen appreciating, is the real economy being swamped by liquidity?

David Hale responded that the yen is strong because it's seen as a safe haven; Japan has some $3 trillion in external assets. Three to five years from now, Japan could have a current account deficit.

"The yen is not strong," Mr. Katz demurred. When the data are adjusted for Japan's deflation, we see that the "real" value of the yen is at its average over the past 30 years, whereas it was 30 percent below that level three years ago. We're back to Herbert Hoover, preaching the virtues of fiscal austerity in a time of recession. We have to understand: Japan is not Greece.

Could you give us some additional insights on Japan's foreign exchange policy?

China's concern, commented David Hale, is that if the renminbi is strong, China will be pressured to put in an easy money policy, which then feeds bubbles. If inflation is 6.5 percent and interest rates are 3 percent, what's an investor to do? The answer is: Buy real estate. What's needed are market interest rates to fix distortions.

What caused Japan's problems was not a strong yen, Mr. Katz said. It was "a screwed-up banking system." Claims that the culprit was a strong yen were just an excuse to blame America: "The U.S. made me do it." The problem is how to correct the consequences of mismanaged banking without causing social dislocation.

—Katherine Hyde

Topics:  Business, Policy

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