🚀 go-pugleaf

Mason A. Clark (masonc@ix.netcom.com) wrote:
:    Any comments on this interview reported in
:    today's paper?  Is Thurow right in recommending an
:    enforced correction of the trade deficit with Japan?
: 
:    The answers by R. Taggart Murphy.  After 15 years as
:    an investment banker in Tokyo, he has a book
:    entitled, "The Weight of the Yen."
: 

I happened to find the complete text in www.usatoday.com. Also I 
cross-posted this to fj.sci.economics and fj.soc.economy for more comments.

U.S. economy hangs on Japan

By Bill Montague, USA TODAY  3/26/96


Q: Why should the United States care about Japanese financial policy? 

A: Japan now controls over half of the industrialized world's savings. 
They are the principal marginal financiers of our budget and trade 
deficits, and have been for the past 15 years. They're propping up the 
U.S. dollar, which allows us to live in a kind of economic dream world. 
We don't have to do the things that other countries have to do. If they 
want to buy foreign goods, they first have to figure out a way to pay for 
them, by making goods or services that foreigners want to buy. All we 
have to do is print more dollars. The Japanese have allowed us to go on 
living in this dream world for at least 15 years beyond its natural 
limits. If they were to stop now, U.S. interest rates would go sky-high. 

Q: Why are the Japanese so desperate to prop up the dollar? 

A: Japan's economic model was built on the assumption of a limitless U.S. 
market. The whole system was based on the deliberate suppression of 
domestic demand. For Japanese industry to grow, purchasing power had to 
come from somewhere, and it came from other  countries, principally the 
United States. That was acceptable when Japan accounted for 1% of the 
world economy. Nobody cared. But now it's 17% or 20%. It's no longer 
possible for the rest of the world to absorb Japan's  surpluses. That 
tends to push the yen higher against the dollar, which makes it 
unprofitable to export from Japan. But the political will in  Japan to 
change the system is close to nonexistent. So what you see are  frantic 
efforts to prop up the existing system, which means buying huge 
quantities of dollars. It allows the system to stagger on for a while. 

Q: But Japanese private investors haven't been big buyers of U.S. stocks, 
bonds and real estate - certainly not like they were in the 1980s. So 
what's holding up the ceiling? 

A: My estimate is private Japanese institutions have lost close to $1 
trillion over the past 15 years on their dollar investments. In effect, 
what the Japanese banks and insurance companies are saying is they are no 
longer willing to take the risk of holding U.S. dollars. So the Bank of 
Japan (Japan's version of the Federal Reserve) and other government-owned 
financial institutions, like the postal savings system, are buying the 
dollars. They're holding up the ceiling. 

Q: Who benefits most from that policy? 

A: On a short-term basis it benefits both sides, otherwise it wouldn't be 
happening. It benefits the USA because it keeps interest rates down and 
makes it easier to finance our national debt. It benefits Japan because 
it allows Japanese companies to continue to sell products in dollars - not
just to the USA, but to all other countries that deal in dollars, which 
means most of Japan's trading partners. 

Q: How long can the Japanese keep it up? 

A: There is a limit. I thought we reached it last year when the dollar 
went from 100 yen to 80 yen in a few weeks. But the U.S. Treasury and 
Japan's Ministry of Finance reached a deal that allows both sides to get 
through the next year or year and a half. But I have grave doubts 
whether it can survive beyond that. The Ministry of Finance's ability to 
keep things going is quite extraordinary. But it's not limitless. 

Q: Why? 

A: Because the pressure to really change things in Japan is off. For the 
Japanese, the current yen-dollar rate is painful but bearable. It's like 
sleeping in a cold room - you're uncomfortable, but not enough to get up 
and close the window. Eventually, Japanese exporters will get their 
costs down and start regaining market share, and the pressure on the 
dollar will come back. 

Q: But if the USA eliminates its federal budget deficit, won't we be able 
to do without Japan's financial support? 

A: The problem is that you can't really run an industrial economy any 
more without Japanese goods. You cannot build a Macintosh computer, or a 
Boeing 747, without Japanese components. So Japan's position is somewhat 
comparable to the Arab oil-exporting countries in the 1970s. If a
rising yen forces Japanese companies to raise dollar prices, the effect 
could be an economic shock similar to the OPEC price hikes of 1974. The 
result would be a global recession. 

Q: Considering how much the USA depends on Japanese money, aren't we in 
danger of losing our national sovereignty? 

A: We've already lost it. Effectively, it's no longer possible for us to 
control our own economic destiny. All this stuff is being said on the 
campaign trail, but it's just smoke. The real decisions affecting the 
prosperity of ordinary Americans are being made inside the  Federal 
Reserve and U.S. Treasury, and inside the Finance Ministry in Tokyo. 

Q: But don't they need us as much as we need them? 

A: It's like a dysfunctional marriage where both parties agree to 
subsidize each other's bad habits. In some ways, it's the most 
fascinating and troubling development in all of American history - first 
because we've become so deeply entangled with a country so different from 
ours, and secondly because only a handful of people really understand 
what's going on.