Land of the Rising Yen

August 7, 2009

Op-Ed Contributor

Land of the Rising Yen

By AKIO MIKUNI
Tokyo

IN the 17th century, after a long series of conflicts that ended in a unified Japan, peace finally came to this country. Commerce flourished. Wealthy women spent money on exquisite kimonos and modeled their original designs at fashion shows. Imports surged of Chinese “white” silk yarn, which Japan paid for in precious metals. A prominent scholar of the time, Miyazaki Yasusada, justified such trade by arguing that you cannot eat or wear gold or silver.

Japanese consumers can be lavish spenders — when they are given an opportunity. I see one coming.

Many would find this hard to believe. For much of the 20th century Japan’s growth was driven by exports, and consumption relative to gross domestic product has been around 55 percent since 1980. This goes back to the 19th century, when Japan set out to catch up with the West by modernizing production and exporting products to advanced nations. It’s become a kind of national obsession to have a weak yen, which helps keep exports cheap and competitive.

But this fixation comes at a high domestic price: We lose much-needed capital — and purchasing power abroad.

Japan is finally ripe for change. Exports have plunged since the financial collapse last autumn. American consumers could not borrow so easily anymore, and were less inclined to spend. While Japanese exports finally seem to be bottoming out, we can’t just wait around for American consumers to become as spendthrift as before. The United States is still burdened with excessive debt, and that seems likely to depress American imports of manufactured goods for years to come.

This is all part of a larger shift in Asia’s role in the world economy. Japan exports some of its goods to the United States indirectly through Asian supply chains. Finished products are assembled in China before they are shipped to the final destination. While we profited from this state of affairs, our long-term priority should be to supply goods to the Japanese market, not to the rest of the world.

So what’s the problem with relying on exports? Let me give a simple example. We manufacture automobiles. When we sell them domestically, this is a boon to Japanese car dealers, insurance salesmen and repairmen. But when we ship them abroad, they are not making a meaningful contribution to the domestic economy. Income earned by the export sector is offset by the amount of capital that we invest in the United States to encourage a dollar strong enough to allow American consumers to buy our products. Sure, we get foreign reserves — like United States government bonds — in return for that capital. But as our 17th-century scholar would remind us, we cannot eat or wear American dollars.

We need to replace external demands with domestic ones. We could do this by exchanging our dollar investments for yen. This would cause the yen to appreciate, reducing the costs of imports and enhancing real purchasing power. Already, some Japanese retailers are slashing prices because the strengthening yen is lowering the cost of their imports. They could do it again if the yen appreciated further.

In the short term, moving away from our long-cherished export model will be painful. We should brace ourselves for factory closings, bankruptcies and mergers. The remaining manufacturing companies will have to shift their orientation. While many have been intent on selling competitively priced goods abroad, now they will need to come up with unique products that can command premium prices.

Japanese companies can rise to the challenge. I have rated corporate bonds for the past quarter-century. In 1983, we had only two AAA-rated companies, excluding financial companies. Today, we have nine. Those companies earned their ratings in part by demonstrating strong price-setting power.

A few decades ago, some Japanese companies would make a point of pricing their own goods 20 percent less than competing products in the United States. Now, many products are being priced independently by Japanese manufacturers. These companies will find plenty of pent-up demand, as Japanese consumers have shown a preference for good quality over low prices.

Japan has been hit hard by the global financial crisis, and this time exports are not going to save us. Instead, we must scrap some of our long-held traditions and start from scratch. Many in government will be reluctant to make this change, but they may soon find that they have no other option. Japanese policy makers cannot keep the yen weakened forever because doing so is costly to the domestic economy, and thus to voters. It’s time for us to learn from the free-spending ladies of the 17th century and enjoy a strong yen.

Akio Mikuni is the president of a credit rating agency.