NEW ADMINISTRATION'S OPTIONS LIMITED

Weak-dollar policy said needed by 2008

by Takashi Kitazume

The U.S. administration to emerge from Tuesday’s presidential election will have to shift to a weak-dollar policy at some point in the next four years, a U.S. expert on trade issues told a recent symposium in Tokyo.

This would inevitably cause greater friction with America’s major trading partners, including Japan and Europe, said Bruce Stokes, international economics columnist for the National Journal, a Washington-based public policy magazine.

Stokes was addressing an Oct. 27 symposium at Keidanren Kaikan that was organized by Keizai Koho Center to discuss the economic and political implications of the Nov. 2 election to choose between Republican incumbent George W. Bush or Democrat John Kerry.

“The next president will inherit a current account deficit of over $600 billion — or 5.7 percent of (the U.S.) gross domestic product — a record high in recent history,” Stokes said.

“According to the International Monetary Fund, no industrial country has ever had a current account deficit of more than 5 percent of GDP and been able to sustain it for very long.”

Stokes quoted former U.S. Federal Reserve Chairman Paul Volcker as saying there is a “75 percent chance that in the next five years there will be a currency crisis in the United States.”

He said: “Most economists in the U.S. believe the nation can sustain a current account deficit of 2 (percent) or 3 percent of GDP. So we have to get (the deficit) down. The question is how.

“We have a $150 billion deficit with China, roughly $100 billion with Europe and roughly $90 billion with Japan. . . . The rule of thumb among economists is that the dollar has to come down 10 percent to reduce (the) current account deficit by 1 percent(age point) of GDP.

“Currently, we can put the situation under control by bringing down the dollar by 20 percent.

“In a year or so we would have to bring it down by 30 percent,” because the deficit is forecast to increase by 1 percentage point each year, he said. If the U.S. currency fell by 30 percent, the yen would be valued at 90 against the dollar.

“Most Japanese economists I talk to say that’s recession.”

Neither Bush nor Kerry will talk the dollar down after taking office, he said.

“The policy in January would be (the U.S.) needs a strong dollar. No president wants to start an administration talking about a weak dollar,” Stokes said.

“But the underlying numbers suggest that at some time in the next four years, the policy of the next administration will probably have to change to a weak dollar.”

This would mean friction on a range of economic and foreign policy issues “because clearly Japan and Europeans would say, ‘America is trying to get us to adjust rather than adjusting herself,’ ” he said.

“We need to worry about how we manage the decline of the dollar and the rise of the yen over the next four years, and I think that’s the major challenge that the U.S.-Japan economic relations will face under the new president.”

Patrick Cronin, senior vice president of the Center for Strategic and International Studies, told the symposium that Prime Minister Junichiro Koizumi’s close ties with Bush will not jeopardize Tokyo-Washington ties if Kerry is elected president.

While a recent international survey found that Bush is unpopular with a majority of Japanese, Koizumi “has stuck out his neck in support of Bush and his policy on Iraq, even though this is not something that will gain him popular favor,” Cronin said.

“One of the questions in Japan is whether this will jeopardize Japan-U.S. relations under a Kerry administration. The answer is no,” he said.

Cronon said that the winner of Tuesday’s election will have to spend a lot of energy on the greater Middle East, focusing on Iraq, as well as the war on terrorism and the nonproliferation of weapons of mass destruction.

He said East Asia will also remain a priority because in addition to the North Korean nuclear threat and other problems, the next president will need to enlist regional support to resolve global challenges.