Greenwood
Recently, I have read a very interesting book about Japanese economy written by a Japanese professor M. Kikkawa. (Library Serial No.435)
According to his book, current difficulty of Japanese economy was caused by Japan's continuous reliance on US dollar as reserve currency for trade and credit supply to other nations namely United States.
When England became a creditor after Industrial revolution, they used Sterling pound for supplying credit to debtor nations, in this case, United States and Canada. Although Britain soon lost competitiveness in international market and trade balance went into deficit, capital gain from credit supply to other nations far exceeded the loss in trade. This stable money circulation is called "Victorian Circulation" by the author. Pacs Britannica was thus maintained.
After World War 2nd , United States took creditors position. But in Kennedy era, US experienced capital out flow. In 1971, US trade balance first experienced deficit. But soon recoverd in 1972 and fluctuated around balance point until it start dropping from 1982. In 1991, it got back to balance point then started dropping again. In 1971, Nixon had to cut the linkage of gold to dollar and exchange rate started floating. According to the author, Japan should start preparing using yen as reserve currency for credit supply to debtor nations as Britain and United State did in the past. But unfortunately, no one considered doing so. Japan's bond issuing system require security or mortgage and thus costly and tedious. No one wished to accept yen bond.
In Reagan administration, wise Volker raised interest rate very high and attracted Japanese investor's eye on US national bond using dollar as reserve currency. This money flow is called "Imperial Circulation" by the author and raised dollar value again.
In 1985, US government have to ask cheep dollar in Plaza agreement to stop trade imbalance. Sharp drop of dollar by concerted intervention did not help to stop trade imbalance. This phenomenon was explained by Krugman's hysterics theory. Japanese government supported US to keep capital flow to US by lowering its interest rate at very low level. This low interest rate created so-called Bubble economy. Because of interest rate difference, most of the capital gain from this Bubble economy flowed into US.
In 1989, at the start of Bush administration, central bank of Japan (BOJ) stopped extreamly low interest rate to stop Bubble economy. After Bubble was intentionally ruptured by raising interest rate, US/Japan differential interest rate was again maintained.
In Clinton administration, US government continued putting pressure on Japanese government and BOJ to keep differential interest rate to keep continuous money flow to US.
During this money circulation, risk of currency exchange was born by Japanese
side. Because reserve currency was not yen but dollar.
Author's answers to get out of this dilemma are firstly, to establish
internationally acceptable bond issue mechanism by deregulation, secondly, stop
investing in US only, thirdly, portfolio investment for multi-currency basis and
finally joining Euro.
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After exchanging E-Mail about Professor Kikkawa's book with my friend in Los Angeles, I started wondering why Professor Kikkawa's book gave me strong moral impact. My emotion was caused by the fact that we suffered very much by fluctuating exchange rate. But even if we have yen as reserve currencies, still it continues fluctuating. It may give us some pride, but it will not help us. Instead, as my friend in Los Angeles mentioned about Britain's struggle to maintain Pound value, it may give us more burdens.
After Professor Kikkawa's book, I found professor Krugman's latest book "The Return of Depression Economy" (Library Serial No.436) in Tokyo bookstore. This book summarizes all his new findings published elsewhere and in his web site. It is very understandable. As professor Krugman suggested in this book, the effect of having reserve currencies to GDP is only 0.1 to 0.2%.
According to him, only escape route for Japan from recent liquidity trap is BOJ to accept 2-3% inflation as necessary measure. This may cause difficulty for other country including US. But he says, this has to be done. But his voice is very small in Japan. There is no sign of our BOJ accepting his suggestion to date. More time is needed for them to understand what he is saying. Once they understand, it may give Mr. Greenspan or his successor hard time to maneuver US economy.
"The Age of Diminished Expectations 3rd edition", (Library Serial No.411) says that blaming exchange rate is pointless. It also sayes that ioining Euro circle is not practical. Fundamental solution is raising productivity of the industry. Namely, developing attractive goods and sell it at higher price.
I think Putting yen to reserve currency position is a good proposal to give more freedom to the world. But it needs more deregulation in Japan.
I now think Prof. K's observation is side stream economics and cause confusion. There are many such kind of books.
My friend in Los Angeles sent me a clip of column in the Economist. Here it is:
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A global money market
It is time for a single market - in central bankers
More and more companies are appointing foreigners to their boards. And global market forces are causing pay for top managers to converge across countries, especially in finance, where talent is quickly poached. So why hasn't the stuffy old business of central banking embraced this trend? The answer is that national barriers are in the way. Amazingly, Alan Greenspan, whom many see as the best central banker in history, is one of the lowest-paid, with a salary of only $137,000. At the other extreme, Antonio Fazio, governor of the Bank of Italy, gets a package estimated at $600,000, even though his bank no longer runs his country's monetary policy. The governors of the European Central Bank, the Bank of Japan and the Bank of England also all earn far more than Mr. Greenspan. When such differences appear in financial markets there should be profitable opportunities for arbitrage.
Speak to almost any central banker today and he will privately express deep misgivings about other countries' monetary policies. By offering themselves for hire, they would get a chance to correct others' mistakes. Take the bank currently making the most obvious error: the Bank of Japan, which has persistently underestimated the risk of deflation and been too slow to ease policy. The BOJ lamely agreed at its meeting on October 13th to increase liquidity slightly, but it rejected full "quantitative easing" (buying long-term government bonds or using unsterilised foreign-exchange intervention). it also ruled out the sensible idea of an inflation target - with a floor as well as a ceiling. Japan's economy has started to grow, but an overly tight monetary policy and a strong yen could easily make it shrink again. The truth is that the BOJ is loath to cave into politicians, even when their demands are reasonable, purely because that might seem to undermine its independence. Indeed the governor, Masaru Hayami, has said he would resign rather than buy government bonds.
The answer to this dilemma is clear: the Japanese government needs to head-hunt Mr. Greenspan, by offering to raise his salary to the world market rate. Overnight, his appointment would restore confidence in the economy; and if he continued with his current fondness for a lax monetary policy, he would stop Japan's deflation in its tracks.
Old Ladies; for hire
In Europe, the ECB has been doing a rather better job; its interest rates look about right. Its critics complain, however, of a shortage of accountability and transparency, and in particular about its refusal to publish the votes of individual council members. Without proper accountability and transparency, the ECB will find it hard to win public support and so will be an easy scapegoat for politicians if things go wrong. This presents another trading opportunity: Wim Duisenberg and Eddie George, the bosses of the ECB and the Bank of England respectively, should do a swap. Mr. Duisenberg could usefully pick up some tips from the Bank of England, which is widely acclaimed as a model of transparency and accountability. Indeed, that central bank should be commended for already having two foreigners on its monetary policy committee. As for Mr. George, he would get useful first-hand experience of the euro to help him build up more enthusiasm for it.
What about the Fed? America's economy looks dangerously overheated; monetary policy needs to be tightened. Who better than Mr. Hayami, who sees inflation everywhere - even, ludicrously, in Japan. And since he does not appear to worry about deflation, he won't mind taking a large pay cut. He could also offer advice, based on Japan's experience, on what not to do when America's bubble bursts which might well happen the instant Mr. Greenspan departs.
revised Nov. 28 1999
Nov. 23 1999