> okay, the "high yen" makes sense to me now, but then why does Japan have > such a large trade surplus?
Basically because the US buys large amounts of Japanese-made automobiles and parts. Meanwhile, only a crazy person would buy a US-made car in Japan. Ford does sell some Mazdas with the Ford nameplate on them (this was the company that levelled 'dumping' charges over 'light trucks' against Mazda even as Mazda was supplying them with the same vehicles--no coincidence that Mazda is now owned by Ford). Japanese, by the way, love European cars. Also, the huge trade surplus looks even more huge when you go from overly strong yen into overly weak dollars. It's a similar effect that makes Japan look like a very expensive place to live--outside of buying property, it isn't. > anyway, let's combine two threads. I'm no expert on Japan -- or foreign > exchange matters, for that matter -- but it seems like there are three > hypotheses I can think of: > > 1) Japan is in recession due to the financial system being overburdened with > bad debts -- this is the basis for US official calls for restructuring. More like the financial system is in distress because of a bad economy and poorly thought out financial liberalization (with the issues being 'what is a bad loan' and 'what are required capital adequacy ratios'--8% being the international standard). > > 2) Japan is suffering from deflation and recession -- this is the basis for > calls for reflation a la Krugman. (I hadn't heard of those other parts of > his program.) Not really Krugman's original thesis, just a bandwagon. > > 3) Japan is suffering because the Yen has been too high relative to the > dollar since the Plaza Accords -- this is the basis for your call for a > movement of the Yen toward purchasing-power parity. I see all three points as working together. The only thing that correlates perfectly as far as I can see with the down economy is the overly strong yen. I became convinced when I saw that the economy was recovering 1995-1997 until the yen went back up, just as the US wanted, and the economy tanked and all of Asia was plunged into a currency, liquidity, debt crisis. Some of that still lingers. I haven't seen any very specific analysis of the loans at banks in Japan in their totality. I don't think there is just one way to characterize them. I think, however, many are linked to small and medium sized businesses, not the Daiei's you hear about in FT. I also think, though, that a lot of these loans are linked to Japanese companies trying pathetically and desperately to set up operations in places like China because of the strong yen. I know of several companies in Fukui that fit the pattern, and if I know of them, then there must certainly be lots more. > > My feeling (not having studied the foreign-exchange aspects of Japan's > stagnation sufficiently) is that what Japan needed was reflation and that > without it, any further financial restructuring would mean deeper recession > and increased US financial power over Japan. So at best, reflation and > restructuring are complementary programs. But what do we mean by restructuring. For the 'analysts' at the investment banks it means selling their consulting services and obtaining insider knowledge on the best stuff to snatch up at 10 cents to the dollar. Reflate the economy and then take care of the restructuring, which I might remind you, is really a microeconomic matter for banks and companies. No one made Koizumi economic dictator--YET anyway. > > Now, depreciating the Yen relative to the dollar would clearly help Japan's > exports. and its economy. But wouldn't that encourage recession in the US? It sure would piss off a bunch of suppliers who rely on China for their supplies. Would a dollar at PPP with the yen encourage recession in the US? No, it would just mean imports would diversify (suddenly Japanese notebook PCs, which are ten times better than anything Compaq sells, would be affordable) and autos would get cheaper. The US economy is much more diverse (as we might expect of a country in the middle of a continent with large amounts of resources and large economies on both the north and south borders) and less volatile than Japan's. It's currency is the de facto currency of the world. It's financial markets are where everyone goes to raise capital or to park it. Charles Jannuzi
