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Balance of payments and intervention signal danger for economic reforms

by Teruhiko Mano

Japan’s international balance of payments for fiscal 2001, released by the Finance Ministry on May 15, highlighted a year-on-year fall in the trade and current account surpluses. But it also revealed a 24.4 percent increase in the nation’s income surplus to a record-high 8.68 trillion yen.

The income surplus was 2.2 times larger than the surplus in goods and services trade, which tumbled 24.7 percent from the previous year to 3.89 trillion yen. That’s a sharp difference from fiscal 2000, when the income surplus was only 10 percent larger than the goods and services balance.

These figures show that the structure of Japan’s international balance of payments has changed substantially, reflecting a major transformation in its economic structure. In a positive light, one could call it the result of Japan’s economy maturing. But to me, the statistics clearly portray an economy in desperate need of structural adjustment.

Japan continues to lack a key airport that can be called a hub for Asia. Like it did in shipbuilding, Japan is beginning to fare poorly in aviation, losing airline passengers to its regional rivals in Shanghai and Seoul.

In addition, its cities suffer from chronic traffic congestion and the quality of its housing lags behind Western nations.

While much remains to be done in terms of infrastructure building at home, the dismal profitability of domestic investments has Japanese savers looking overseas for places to park their money. This is what the Finance Ministry’s figures show.

To speak in soccer terms, Japanese savers have given domestic investment a yellow card, if not a red card.

If this situation continues, it is clear the decline in Japan’s international competitiveness will only accelerate.

To avoid that, we have to eliminate the cause of the savings flight — unprofitable domestic investments. This problem is mainly being caused by Japan’s relatively high cost structure, a malady for which there is only one cure: deregulation.

The surge in Japan’s income surplus mirrors the fact that Japan’s land prices and wages are still much higher than in the rest of the world.

People seem to forget about the once-repeated problem of the international gap in prices, but the situation has not been corrected. While many people decry deflation, Japan’s real problem is its high price structure.

On May 22 and 23, Japan’s monetary authorities intervened in the currency market to support the dollar against the yen when the U.S. currency entered the 123 yen range. It was the first step of its kind since the terrorist attacks in the United States last September.

Japanese officials said they took action because the dollar was falling too fast, which could have a negative impact on corporate earnings and the much-awaited economic recovery.

It is indisputable that stable currency exchange rates make cross-border transactions easier. But it is also true that a stronger yen will help correct Japan’s high price structure and promote structural economic reform.

Another odd thing is that financial authorities take action only when the dollar is falling rapidly against the yen.

On the other hand, Japanese authorities tolerated the rise of the dollar from below 130 yen to 135 yen over a short period in March, never referring to the speed of the fluctuations.

True, a rising yen works against export-oriented firms, but it is doubtful we can call the yen “too strong” at 123 to the dollar. Last year, the yen averaged 125 to the dollar. As long as Japanese consumers cannot expect wages to increase in the near term, a strong yen will bring benefits. Nevertheless, the government keeps its eyes only on export competitiveness and maintains a currency-exchange policy of catering to the needs of business.

In the stock market, there is an incorrect but deep-rooted conviction that the dollar’s rise will lead to higher share prices. But recent patterns indicate the stock market rises when the yen does. The recent rise in both the yen and share prices reflects receding hopes for a quick recovery in the U.S. economy and growing opinion that Japan’s economy has hit bottom, both of which have prompted nonresident investors to pour funds into Japan.

Whereas the United States continues to suffer from the deficit in its international balance of payments, Japan’s current account surplus, although declining, remains huge at 11.9 trillion yen. Despite its deficits in both the current account and income balances, the U.S. government maintains a policy of pursuing a strong dollar, mainly because it knows that a strong dollar benefits American consumers and is necessary for making up for the nation’s savings shortage by attracting investment from abroad.

In this sense, I would like to place a question mark over the recent dollar-buying intervention by Japanese authorities, because I believe it runs counter to the interests of Japanese consumers and could also delay structural reform of the economy.