While the U.S. and Japan are stepping up political pressure on China to float its currency, some economists are asking if that’s really the right policy.

An undercurrent of concern in Japan’s financial corridors is that any sharp appreciation of the yuan against the yen could hit Japanese industries and the nation’s stagnant economy.

Chinese leaders insist they are in no hurry to float the yuan. But if China conducts an upward revision of its currency, which has been pegged at around 8.30 to the dollar for the past nine years, it would drive up production costs at Japanese plants in China, eventually eating into corporate profits.

A higher yuan would also undermine China’s exports, which have been the major engine for Chinese economic growth, and would eventually weaken China’s economy and slow down its imports from Japan.

“The Japanese and Chinese industries play a highly supportive role for each other now,” remarked Seiji Adachi, an economist at Credit Suisse First Boston Securities (Japan) Ltd. “So, if the yuan floats higher, it would have a bad impact on Japan.”

Debate over the yuan’s revaluation heated up last week, when U.S. President George W. Bush said that China’s currency policy was unfair and that Washington would “deal with it accordingly.”

In addition to agreeing with Finance Minister Masajuro Shiokawa last week in Tokyo on the importance of a flexible foreign exchange rate with regard to the yuan, U.S. Treasury Secretary John Snow has also said he will address the currency issue during the Group of Seven meeting of finance ministers in Dubai next week.

The U.S. argues that the yuan’s peg, which makes it easier and more profitable for Chinese companies to export to the U.S., results in higher U.S. unemployment.

The U.S. trade deficit with China hit a record high $100 billion in 2002, well above Japan’s 2.75 trillion yen deficit with China in the same year.

Japan has also blamed low-priced Chinese products for domestic deflation. But the trade equation between China and Japan is not so simple; the yuan’s flotation could pose risks, particularly to Japanese manufacturers.

Today, an increasing number of Japanese manufacturers depend on their production bases in China to slash costs, while also counting on the nation’s vast market and its growing purchasing power.

Toshiba Corp. assembles home appliances such as digital TV sets and DVDs in China, while high-tech components such as semiconductor chips are produced in Japan.

Toshiba’s China-related trade is expected to grow 40 percent to 500 billion yen in fiscal 2003, according to the firm.

Meanwhile, Honda Motor Co. is assembling 50cc motor scooters in China. It has shipped 100,000 of these scooters to Japan in the past year.

The automaker also exported 7,000 four-wheel vehicles assembled in Japan to China in 2002, targeting high-end consumers there.

Honda said it would be possible to react to any sharp rise in the yuan by shifting its China production to Southeast Asia.

Toshiba said it would not immediately suffer amid any rise in the yuan, as its exports and imports with China are roughly balanced. Yet it did not rule out a potential negative impact on its manufacturing costs.

According to an estimate provided by Credit Suisse First Boston, a 40 percent rise in the yuan to 5 yuan to the dollar would reduce China’s trade surplus with Japan as of 2002 to zero.

Adachi also said that even if the yuan surges to this degree against the dollar, Japan could produce a limited number of items — lead, aluminum, copying machines, tape recorders — more cheaply than China.

A higher yuan would benefit other Asian countries — such as Indonesia, the Philippines, Thailand and Malaysia — that produce similar low-cost items to those made in China, including air conditioners, refrigerators and washing machines.

Economists also argue that Japan would not be alone in feeling the negative impact of a stronger yuan.

Akio Shibata, deputy director of the Marubeni Research Institute, said a surging yuan would also erode the global competitiveness of South Korean and Taiwanese companies, which also have manufacturing bases in China.

Why, then, is Japan trying to prod China to float its currency?

Toyoo Gyoten, president of the Institute for International Monetary Affairs, said the issue is highly political, adding that Japan only wants to protect old and politically strong industries, such as agriculture.

These industries can’t compete with products made in countries like China, where labor costs are cheap, he said.

“I don’t buy the idea that the Japanese economy won’t revive unless China lets the yuan float,” Gyoten said. “Japan shouldn’t bring up its own political problems when it talks about the yuan’s fate. Japan should focus on reforming its industrial structure.

“It is impossible to solve those industries’ problems by moving currency rates.”

Gyoten was dabbed the “Currency Mafia” when he served as vice finance minister for international affairs in 1980s.

U.S. and European firms meanwhile do not share the same problems. Shibata said they will not be hit directly by higher Chinese manufacturing costs as they have tapped the Chinese retailing market directly.

For example, large retail stores — such as Wal-Mart of the United States and Carrefour of France — have opened outlets in China, while global energy companies such as ExxonMobile and the Royal Dutch/Shell Group have launched energy development businesses, he said.

Economists agree that any revaluation should not come before the 2008 Olympic Games in Beijing, as its economy would not be strong enough to absorb the impact of a floating yuan before then.

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