Re: Fix the Yen

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

Wayne Angell, like many of his American colleagues, totally misunderstood
the Japanese problem as one of simple economic stagnation/deflation.  For
almost a decade, the government has been absorbing the brunt of the
economic pain to protect the private sector and consumers with a
political aim of preserving the Japanese system.  Japan fears becoming a
second England after the big bang.  While The United Kingdom has totally
abandoned nationalism in favor of US domination, Japan sees economic
nationalism as its ticket to a level playing field in globalization.  It
is persistently reluctant to demolish its traditional institutions and
business culture and face the risk of being acquired by a superior
foreign financial machine.  It resents repeated blockage by the US on
Japan's attempts to assume leadership in structuring a recovery in Asia,
and it does not consider self-serving American advice to open up the
Japanese market and to adopt American style reform as being in Japan's
best national interest.  There is a wide gap between Washington and Tokyo
on the proper yen/dollar exchange rate between 100 and 150.  Washington
wants the rate to be above 120 and Tokyo wants it below 120.  To Tokyo.
cleaning up the Japanese banks does not mean handing the Japanese banks
to American parents.

Rubin/Summers turned down a Japanese/EU joint proposal for a
3 currency stabilization regime last month at the G7 meeting in Bonn.
Being a bit humbled by his own dismal record of first diagnosing the
Asian crisis as merely transient, then IMF off-the-shelve
conditionalities as the only cure, and finally non-intervention of free
financial markets as a inviolable guiding principle, Summers declared
vaguely this time the Krugman cure: "What I think is crucial is the
recognition that the goal of price
stability include the responsibility to avoid deflation."
He and Rubin declared only last month that while free markets are not
perfect, all other forms intervention alternatives are worse.  Now, he
went to Japan and again asked the Japanese to intervene in their economy
with interventionist monetary policies.
Yukihiko Ikeda, a senior member of the ruling Liberal Democratic Party,
reported told the press: "Mr. Summers says, do this, do that.  But we
will continue with steps already in the works."
Japanese officials are generally of the opinion that reflationary
policies would further weaken the yen, due to pressure on the value of
the yen from any increased supply.  It may lead to further currency
devaluations in other parts of Asia.  The BOJ, Japan's central bank,
thinks Summers is offering snake oil cures in the
notion of fighting deflation with easing money supply.
Meanwhile, the prime minister of Malaysia is publicly urging Japan to
dump its US Treasury holding to show Asia's displeasure on US
nationalistic globalization policies.

*****************************************************
February 20, 1999
RR-2965

POST-G-7 PRESS STATEMENT by TREASURY SECRETARY ROBERT E. RUBIN BONN,
GERMANY

We focused on two main topics in today's meeting: first, the outlook for
growth in our own economies, and in the world economy more generally, and
second, the key issue of global financial architecture.

On the first, we all agreed on the importance of strengthening the
foundations for sustainable growth. As far as the United States is
concerned, the overall outlook for us remains favorable, with solid
growth expected again this year. But it is crucially important that Japan
and Europe also move forward with domestic demand-led growth in their
economies, to achieve more balanced growth among our countries, reduce
the large external imbalances and support recovery in emerging market
economies.

As always, we discussed exchange rates. Let me read for you the language
that summarizes our discussion: "We reaffirmed our view on the importance
of pursuing policies to help avoid excess volatility
and significant misalignments of exchange rates of major currencies. We
will continue to monitor developments in exchange markets and cooperate
as appropriate."

As far as emerging market countries are concerned, we welcomed the
progress in restoring financial stability and strengthening the basis for
growth in many Asian countries. We welcomed the commitment
of the Brazilian authorities to a strengthened economic program and urged
them to continue their reform efforts.

Our second major focus, reform of the international financial
architecture, took up a good part of our discussions. This is an
extremely complex issue which will take a very long time to resolve in
all its facets.
Our approach has been to press forward with concrete steps in line with
the framework set out at the end of October by G-7 Leaders. Already an
enormous amount of work has been done and I am pleased that we were able
to make further progress during today's meeting.

The communique lays out a number of areas of progress. Let me point to
four:
      We agreed on a significant strengthening of disclosure through the
IMF's Statistical Data Dissemination Standard (SDDS) to give a full
picture of countries' foreign exchange reserves -- essential for alerting
investors and policy-makers alike as soon as a country's international
position begins to deteriorate.

      We welcomed the progress being made on developing an enhanced IMF
facility aimed at reducing the risk of contagion by providing a
contingent line of credit to countries affected by financial contagion.
We agreed to work at the IMF to bring this facility on-line as soon as
possible.

      We agreed to move forward with President Tietmeyer's proposal on
convening a Financial Stability Forum, although some of the details still
need to be worked out by our G-7 Deputies. We want to use this Forum to
improve the cooperation between national and international authorities
and relevant international bodies to promote international financial
stability.

      Fourth, one of the most critical elements for the new architecture
will be steps to protect the vulnerable in society and spread the
benefits of globalization broadly within our societies and around the
world. With this in mind, my G-7 colleagues and I stressed the importance
of work on principles of good practice in social policy and agreed to
press for these to be brought into operational use as quickly as
possible.

Our discussion also highlighted the importance of exploring ways to
strengthen the HIPC debt initiative.
We hope to reach agreement by the Cologne summit in June on ways to do
so.
***************************************************

Communique of G-7 Finance Ministers and Central Bank Governors February
20, 1999  Petersberg, Bonn

G-7 Economies

3. We remain committed to a domestically based growth strategy that would
contribute to achieving more balanced growth among our countries,
reducing external imbalances and supporting recovery in emerging market
economies. The outlook for price stability in our countries as a whole
remains favorable.

4. In view of the challenges facing each of our economies we reaffirm the
importance of intensified cooperation among us: 

      In the United States and Canada economic growth is expected to slow
gradually, but the overall economic outlook remains favorable. In these
countries, policy should be directed at maintaining necessary conditions
for sustainable growth. 

      In the United Kingdom growth is expected to be lower than last year
but to recover thereafter. With a less inflationary outlook, interest
rates have been reduced sharply and economic policies will continue to
help create the conditions for sustainable growth.

      In the euro area growth expectations for 1999 have been lowered.
The magnitude of the slowdown may differ among these countries. They
agree on the importance of pursuing an appropriate mix of macroeconomic
policies and structural measures aimed at promoting strong and
sustainable domestic led growth and fostering employment.

      In Japan short-term prospects remain uncertain. The Japanese
authorities have adopted important steps to strengthen the financial
system and macropolicies to reinforce growth led by domestic demand and
need to push ahead with the implementation of their policies directed to
those ends.

We welcome the successful introduction of the euro in eleven member
states of the European Union. The euro has been well received in the
international financial and foreign exchange markets. The introduction of
the euro helped avoid spill overs of turbulences to financial markets in
Europe. Economic and monetary policies of the euro area will have
significant implications for the stability of the global financial and
monetary system.

The international monetary system and exchange rates

5. In view of the increasing integration of the world economy and
financial system we have a special responsibility with regard to
improving the conditions for a proper functioning of the international
financial and monetary system and, in particular, enhancing sound
fundamentals necessary for exchange rate stability. To this end, we will
maintain strong cooperation to promote stability of the international
monetary system and to promote exchange rates among major currencies that
are in line with fundamentals.

6. We discussed developments in our exchange and financial markets since
our last meeting. We reaffirmed our view on the importance of pursuing
policies to help avoid excess volatility and significant misalignments of
exchange rates of major currencies. We will continue to monitor
developments in exchange markets and cooperate as appropriate.

*****************************************************

February 26, 1999
RR-2983

"JAPAN AND THE GLOBAL ECONOMY" DEPUTY TREASURY SECRETARY LAWRENCE H.
SUMMERS NATIONAL PRESS CLUB TOKYO, JAPAN

Six months ago, in the wake of the Russian financial crisis, signs of
significant strain in United States and global financial markets, and
evident concerns about global growth -- the G7 warned that the balance of
risks in the global economy had shifted, and emphasized their commitment
to promote sustainable global growth. As Secretary Rubin and I discussed
with our G7 colleagues in Bonn last weekend, since then there has been
some important progress made. But very large challenges remain. Two stand
out.

First, there is too little growth in the global economy. The risks around
the world are still very much tilted toward lack of growth, spare
capacity, and slowdown -- rather than toward economic overheating.
Concerns are about excess supply not excess demand. And in many places
worries about rising prices have given way to concern about falling
prices.

Growth in Europe has weakened, and is expected to average at best 2
percent this year. While prospects for Japan also look worse than they
did a few months ago, with most forecasters now expecting another year of
negative growth in 1999, and IMF and private forecasts projecting a
decline in prices.

Second, there is too little balance in growth. Growth in the United
States has been very strong, but -- at 4 percent -- very likely above
long run trend sustainable rates and is giving rise to very substantial
imbalances. Private sector forecasts are suggesting that the United
States current account deficit rose by more than $80 billion, to $235
billion in 1998, while Japan and Europe are expected to have had current
account surpluses of $95-115 billion. United States imports from emerging
Asia, for example, rose by close to $12 billion last year, as compared
with a nearly $20 billion decline in Japanese imports from these
countries.

The United States accounted for more than two-thirds of growth last year
in the major industrial economies and one third of global growth. On
current forecasts it will account for a similar share this
year. With growth in the world increasingly dependent on the United
States, and growth in the United States increasingly dependent on the
American consumer, it is crucial -- both because of the slowdown directly
and because of the consequences of imbalanced growth -- that we see a
strengthening of global growth as an imperative for policy. And
appropriate domestic policies aimed at promoting sound and sustainable
growth at home can also help lay the foundation for more stability in
exchange markets.

And no country, other than the United States, is more important to an
effective global growth strategy than Japan: the second largest economy
in the world and by far the major economic power in Asia. Even today,
Japan accounts for two-thirds of the Asian economy. A global economy
cannot be fully successful without a successful Japan.

II. The Challenge of Growth in Japan

All in Bonn, I think, recognized that an important evolution has taken
place in Japan's approach to the crisis. Moves to implement more
ambitious plans for strengthening the financial sector have been
particularly welcome. In that context it has nonetheless been troubling
that -- as the G7 identified -- if anything, the uncertainties facing the
economy have increased and growth forecasts have been revised further
downward.

It is now very widely recognized that the overarching challenge of policy
in Japan today is the creation of strong domestic demand-led growth. The
tools that can be enlisted to meet that challenge are three-fold:

1. Fiscal and Monetary Policy
As the G7 agreed last week, the outlook for price stability in our
countries as a whole remains favorable.
The goal of price stability, of course, also means avoiding deflation.
The government will need to ensure that the promised fiscal stimulus is
fully implemented and sustained over the next few years. Its boost to the
economy should also be accommodated by monetary policy. And going forward
it will be important to think creatively about the best use of all the
tools of fiscal and monetary policy to create an expectation of
confidence and renewed growth.

2. Financial Stabilization

Banks are still undercapitalized.
A mountain of bad assets still stands in the way of cleansing bank
balance sheets once and all.

3. Structural Reform and Market Opening

*****************************************************

March 2, 1999
RR-2990

"The United States and the Challenge of Global Growth"
Remarks by Lawrence H. Summers Deputy Secretary of the Treasury
National Association for Business Economics

By far the most important factor in determining how the next months play
out in Asia will be what happens in Japan.
We all agree on the importance of price stability -- but it is important
to recognize that the goal of price stability means avoiding deflation as
well as inflation.
Going forward, it will be critical to the stability and growth of the
entire region that the exchange rate does not become a substitute for
policy

****************************************************
Behind the diplomatic characterization of general agreement on ultimate
purpose, the gulf on specifics between Washington and Tokyo is wider than
the Pacific Ocean.
Summers has had a running dispute with Sakakihara for years.
Rubin/Summers want international regulations on national governments but
not on capital markets.

The Japanese Vice Finance Minister for International Affairs, Eisuke
Sakakibara, delivered a coherent assault on macro orthodoxy relating to
globalization in a speech before the Foreign Correspondent's Club on
January 22 entitled: The End of Market Fundamentalism.
Sakakibara's view: "Each nation's capitalism must conform to agreed
international rules and regulations but need not assimilate the domestic
rules and regulations of another country. The world as a
whole will probably gain from the systemic diversity of its participating
nations as long as they abide by common international rules", is heresy
to American globalization.


Henry C.K. Liu


"Prof BJ Moore, Ekonomie, tel 2416" wrote:

> William
> If the Fed and the Bank of Japan both agree to peg the rate, they can
> continue to hold it indefinitely, since they each have an unlimited
> supply of their own currency.
> Basil
>
> Date:          Tue, 13 Apr 1999 17:11:55 GMT
> Reply-to:      pkt@xxxxxxxxxxxxxxxx
> From:          wfhummel@xxxxxxxxxxxx (William F. Hummel)
> To:            POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
> Subject:       Fix the Yen
>
> A piece by that name appears on the editorial page in the Wall
> Street Journal by former Fed governor Wayne Angell.  He is
> proposing that the Bank of Japan work its balance sheet as
> required to fix the exchange rate between the yen and the dollar
> for some extended period, at least 3 to 5 years.  He claims that
> "would mean abstinence savings above capital spending would be
> drawn into the global capital market.  Japan could thereby turns
> its high savings rate into a comparative advantage.  And Japanese
> households would no longer be penalized by low interest rates,
> but instead would be rewarded by the level of interest rates
> prevailing in world capital markets.  ....  Deflation would end.
> Price stability would return."
>
> One can debate the real effect on the Japanese economy, but the
> notion that the BOJ could actually engineer a fixed exchange rate
> is the most questionable point in my opinion.  Any comments?
>
> William F. Hummel