Bloomberg News

Yen Sales Undermine a Free-Trade Deal for Japan’s Noda: View

November 16, 2011

Nov. 15 (Bloomberg) -- There have been two very welcome pieces of news on Japan’s economy the past few days.

First was the announcement over the weekend that Prime Minister Yoshihiko Noda had bucked opposition from Japan’s agricultural lobby and agreed to join the Trans-Pacific Partnership. This trade accord, which will include the U.S. and eight other Pacific Rim nations, offers the hope that Japan is serious about becoming more competitive and letting market forces shake things up.

The other was the report yesterday that Japan’s economy grew for the first time in four quarters, aided by exports.

So it’s discouraging that Japan seems unable to shake off its anachronistic and obtuse policy of trying to weaken the yen in a vain attempt to aid its export industries.

Noda and the rest of Japan’s leadership would defend the latest round of yen sales last month as vital to restoring sanity to markets. We believe it does just the opposite and makes us wonder how serious Noda is about following through on long-overdue reforms that have contributed to Japan’s multiple lost decades.

The timing of the yen ploy on Oct. 31 says a lot. It came on a Monday of a big corporate-earnings week and followed days of warnings from Finance Minister Jun Azumi. This gave corporate executives a pretty good idea of when to shift mountains of dollars back home, just in time to be converted into more yen to pump up earnings.

Start Worrying

Capital flows work both ways, though. How many investors want to be in yen knowing their holdings might be devalued on a whim? As for Japan’s executives, they should worry more about corporate governance than exchange rates. The widening scandal at Olympus Corp., to cite but one example, serves as a reminder that Japan still insists on playing by its own insular rules.

Analysts estimate that the Bank of Japan sold about 8 trillion yen ($102 billion) at the end of last month, sending the currency down as much as 4.7 percent before it rose again. For exporters struggling with shaky global demand, turbulent markets and factory shutdowns from the Japanese earthquake and Thai floods, it was welcome, albeit brief, relief.

But this routine steals growth from the future. Constant handouts to the private sector breed complacency and deaden the necessary forces of creative destruction. Without growth, Japan won’t be able to reduce its towering public debt, which is double the size of the $5.5 trillion economy. Stagnation, now reaching into a third decade, shouldn’t be tolerated as Japan’s aging workforce becomes less competitive amid the rise of China, India and South Korea.

Job protection, rather than job creation, is at the heart of Japan’s tired efforts to weaken the yen. It’s why corporate behemoths are sucking up all the financial oxygen that would be better used on startup companies. This absence of new businesses, and the innovation they often foster, explains much of the deficit in job growth.

Japan’s creaky tax system should also be tweaked -- for example, lowering corporate taxes for startups and offering tax credits for each job created -- to spur investment in new businesses. The World Bank ranks Japan as 107th, just ahead of Burundi, out of 183 nations in ease of starting a business.

There’s much more that Japan can do: Tapping its female labor force would shake up the boys club that dominates most companies; welcoming more immigrants might bring fresh blood and vigor to an economy and culture where bucking the status quo is taboo; a vigorous shareholder-rights movement might start holding inept and corrupt managers accountable.

Japan has spent more than 20 years relying on an economic model that was devised to rebuild a nation devastated by war. In that respect, it was spectacularly successful. Yet it’s been clear for a generation that this way of doing business doesn’t work anymore. At some point, leaders such as Prime Minister Noda have to recognize that driving down the yen resembles nothing so much as doing the same thing over and over while expecting a different result.

--Editors: William Pesek, James Greiff

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To contact the Bloomberg View editorial board: view@bloomberg.net.


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