SAVING THE YEN
June 17, 1998
The NewsHour with Jim Lehrer Transcript
The United States moved to help the Japanese economy. The Federal Reserve sold American dollars and bought Japanese yen. After this background report, three experts discuss what this action will do for the yen, and the prospects for an economic turn-around in Asia.
ELIZABETH FARNSWORTH: And for more we're joined by John Letiche, Professor of International Economics at the University of California at Berkeley; Ayako Doi, editor of the Japan Digest, a daily economic and political newsletter; and Arthur Alexander, president of the Japan Economic Institute, a research center in Washington, supported by the Japanese government. Mr. Alexander, why did the U.S. Government take this action today?
A RealAudio version of this segment is available.
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ARTHUR ALEXANDER, Japan Economic Institute: Well, a look as though the yen was probably way under valued compared to what it ought to be, although that's always a judgment call. There's a lot of fear that this was going to affect this weekend was going to affect the Asian economies adversely and perhaps the U.S. economy. I think some of these fears are a little exaggerated, but we didn't know where the yen was going, and it looked like it was going South, so it may have been time to ask.
ELIZABETH FARNSWORTH: And, Mr. Alexander, what was done exactly?
ARTHUR ALEXANDER: Well, when you go out and support a currency, you basically buy it. The U.S. has lots of dollars it can put out on the market to buy yen. And Japan also has a lot of dollars that it can be selling to support the yen. They will buy back their own currency. So in that way they'll drive up the value of the yen, drive down the value of the dollar. We have lots of it, lots of dollars. Japan has lots of dollars to do this.
ELIZABETH FARNSWORTH: Mr. Letiche, Professor Letiche, how do you explain the yen's slide, and how serious was it?
JOHN LETICHE, University of California, Berkeley: It was very serious, Elizabeth, because the Japanese economy has been the worst-managed economy among industrial nations in the last seven/eight years. And what happened is that evidence in the last two days showed that the major economies in Asia, Thailand, Indonesia, Malaysia, South Korea, and Japan are, in fact, in a depression. There was evidence that the Japanese government wanted to now, more than ever, expand policies, but so was the fear in Japan that if they do that, prices might go higher, and they would fall further. And there was no evidence that any other countries will collaborate with Japan to prevent it from, in fact, falling up to 150 to the dollar, and consequently, the president's action, both of our central bank, and Japanese should behave together-was crucial for Japan to have the confidence to implement policies of expansion without fear that the yen would be falling further.
"Very little buying by public and very slow growth."
ELIZABETH FARNSWORTH: Ayako Doi, before we go any further, for those of us who don't follow Japan as closely as you all do, just remind us why Japan has had this worsening economic situation for eight years.
AYAKO DOI, Japan Digest: Well, for eight years, well-to begin from a more recent month-this current downturn started last April when the government took off the special income tax cut and raised national sales tax and that sort of plummeted the Japanese economy into, you know, very little buying by public and very slow growth. And people were saying at that point, well, it will last for two or three months, but it will be okay by the fall. Well, it didn't come up in the fall, it didn't come up in the winter, and the government has been rather slow to respond to the obvious downturn that was continuing.
ELIZABETH FARNSWORTH: Okay. Ms. Doi, I want to get into that in just a minute, but before we go on, how is this crisis seen inside Japan?
AYAKO DOI: Well, I am-
ELIZABETH FARNSWORTH: How is it viewed?
AYAKO DOI: I'm afraid that for ordinary Japanese on the street things are tough, for sure. People are hanging onto jobs much more tightly than before, and then it's tough for older people and the college graduates, people out of college, to get a job. But, overall, people are not suffering that much, people are living quite well. They may forego one overseas vacation a year or something like that, and they may not buy as many clothes as they would buy, as many expensive items, but people have most of the things that they want in their house already-wide television screen, videotapes, and everything. And so I think there is a very little sense of crisis among the Japanese people.
ELIZABETH FARNSWORTH: Is that one reason, Arthur Alexander, for why there's been a fairly slow response to the yen's slide and all the problems that Japan has?
"A political system that's immobile."
ARTHUR ALEXANDER: Well, I think that's one important thing. There's a lot of anxiety but not a keen sense of crisis. I think Tokyo is now the anxiety capital of the world, but we have a political system that's immobile. It's very difficult to have real leadership, and we have an economic system that has too much invested in the wrong places, very low rates of return. A very bad loan situation that we heard mentioned in the opening segment. That's about three or four times what we had in our savings and loan crisis, bad loans that are approaching 15 to 17 percent of the total economy.
ELIZABETH FARNSWORTH: Let me interrupt you just for a second. Explain the bad loans. That's something that's hard for many of us to understand.
ARTHUR ALEXANDER: Anyone from Texas will understand it if they go back to the 1980's. This was lending done by banks to property companies, to build everything from new office buildings to golf courses and to invest around the world, created a bold economy of fast rising prices that then collapsed. They couldn't pay back those loans. Those loans now that cannot be paid back are variously estimated at something like $500 billion to maybe $1 trillion--some 15 percent of the total economy. And the U.S. and our savings and loan problems we have 4 percent of the economy. This is a major problem that has to be addressed.
ELIZABETH FARNSWORTH: How do you see the Japanese government's failure to act? We heard, for example, in Spencer's report that the prime minister has said he knows the urgent action is needed, but we've heard that before, haven't we? Why-I know there hasn't been a failure, but why hasn't there been more action?
JOHN LETICHE: The term that is used that Japan has been politically and economically immobilized is perfectly accurate. And the reason for this have been three, as mentioned, the banking crisis that it went through when above all property values and values of stock market, they crashed; then when the central bank of Japan tried to do everything possible to stimulate the economy by making money cheaper, people could borrow, the banks were in such difficult straits that rather than expanding, what they, in fact, did is improve their portfolios, so the banking system failed to be able to expand first.
Secondly, as mentioned, last year Japan made a very serious mistake. They increased taxes on consumer goods, because they thought the economy had turned around. That was a major error.
But the key factor is the Japan treasury has realized that the Japanese people becoming older are very much afraid that an expansion could raise prices and could endanger their Social Security, therefore, there have been no political pressures at home against the treasury to lower income taxes and, in fact, effectively increasing income policy-so monetary policy failed, income policy failed. The only, therefore, opening was for the restructuring of the economy, open it up. That's a long-term process, and for these reasons the depression in Japan will probably last longer than the economics profession had thought. Namely, you don't only have the problem of dealing with a crisis; but you have the fundamental problem of restructuring the banking system to gain confidence because not only have consumers virtually stopped buying much but investment has also declined. And Japanese exports have been falling-very seriously to the rest.
ELIZABETH FARNSWORTH: And Ayako Doi, what's the political component to this?
AYAKO DOI: Well, I was going to come to that. This is really a symptom of lack of political dynamism in the Japanese political scene. Prime Minister Hashimoto's popularity rate, approval rate is very low right now. It's been coming down since last summer or so steadily, and it is down to less than 30 percent, while the disapproval rate is something like 60 percent. And, nevertheless, last weekend there was one by election to the Diet, to a Diet seat. And the LDP, which is Prime Minister Hashimoto's party, won very big, and people are wondering why outside Japan. People in Japan know very well that there is no replacement for Prime Minister Hashimoto, not within his own party, nor in the opposition. I mean, there are some able people, I'm sure, but do they come with a political backing enough to challenge him? No. And so people are disapproving his economic policy, although he does get some approval on foreign policy side. But there is no replacement to be found and opposition are so fractured that they can't put their act together, and they are having a national election next month, the upper-half of the upper house of the Diet will be reelected-I mean, to be up for election next month. And the people are already forecasting there will be a big win for LDP again. And so there is just no political pressure to do anything about the crisis that Japan is facing.
Implications for the U.S. economy and the rest of the world.
ELIZABETH FARNSWORTH: And, Arthur Alexander, what are the implications of this crisis now for the rest of the world?
ARTHUR ALEXANDER: Well, I think they're less than a lot of people are saying, and some of the hysterical talk that we hear from around the world. When we look at the numbers about imports and exports from Japan to other countries and other countries to Japan, it only adds to a few tenths of a percent of a total country's economy, whether it's Korea, Indonesia, or the United States-that is, unless there's a meltdown, if these bad banks and the bad loans really get out of control, and this is what everyone is deathly afraid of, we get some large bank failures, some corporate failures. Then we could have a major problem in a major economy. And I think that the president here and others are hoping to avert that, but lacking that, I don't think we have as serious a problem as we're hearing.
ELIZABETH FARNSWORTH: Professor Letiche, very briefly, because we don't have much time left, what are the implications for Americans?
JOHN LETICHE: I think we should realize what was said was correct. There are no factors now to show that the United States could go into a recession in 1998. So the impact is small, but there are more important than economic factors here. There are human factors. Mass unemployment is a curse, and it's having its effect in each one of the Asian countries and in Japan. People are now taking jobs, sweat jobs, exploiting child labor to a greater degree than ever before. When that increases, there's a terrible danger of those exports increasing in the United States and politically the United States Congress should react with regard to protection against them. There's nothing worse for the American economy or for the world than for the United States Congress to start getting into the act with regard to protectionist policies, therefore, it's crucial not only for the United States to be collaborating with our major ally, Japan, but we should bring in the seven other major countries of the world to apply all the external pressure we can that Japan should expand.
ELIZABETH FARNSWORTH: Okay. Thank you all very much for being with us.