After appreciating against the dollar for almost a quarter century, the yen turned downward in mid-1995 and has fallen steadily since then. The recent acceleration of this trend prompted Japanese and American authorities to intervene to try to halt the yen's slide. To put the drop in perspective, long-term equilibrium estimates of the Japanese currency's value place it in the range of ¥90 to ¥110=$1.00, some 30 percent to 40 percent above recent levels. Calculations of exchange rate dynamics suggest that it could take up to two years for the actual value to approach the long-run estimate.
The yen's depreciation could be a symptom of capital flight itself a reflection of the low rates of return available at home and an apparent loss of confidence in the Japanese economy as well as of permanently weak aggregate demand. Savings invested abroad since 1980 now generate a return flow of investment income that totals about 1.4 percent of economic output. In the long run, this inflow will bid up the yen's value and, in the process, reduce Japan's huge trade surplus, which, by absorbing production, has substituted for a shortfall in domestic demand. In the meantime, the continuing movement of savings abroad puts short-term downward pressure on the yen. It also creates a reverse influx on earnings that increasingly could short-circuit the stimulative effects provided by the trade surplus.
The solution to the pending problem of permanent underconsumption in Japan is to raise domestic rates of return on capital by writing down the value of weakly performing assets. Higher yields at home would help boost both consumption and investment, thereby bringing new vigor to the Japanese economy.
TOKYO RUSHES BANKING PLAN, BUT MARKETS REMAIN SKEPTICAL by Jon Choy
To arrest the yen's fall against the dollar and to calm financial markets jittery over Japan's recession, the ruling Liberal Democratic Party and Prime Minister Ryutaro Hashimoto accelerated their timetable for producing a detailed plan to resolve the banking industry's nonperforming-loan problems. The cornerstone of the LDP's "total plan" to restore confidence in the financial system and to get the economy moving, the latest iteration of the bad-loan cleanup strategy seems to encourage banks to dispose completely of their nonperforming assets rather than just setting aside loan-loss reserves. It also outlines a complex framework meant to prevent the failure of one bank from endangering the entire financial system or the economy.
ANNUAL SHAREHOLDERS' MEETINGS INCH TOWARD CHANGE by Barbara Wanner
Just as the Japanese government faces both domestic and foreign demands to deregulate the economy, corporate Japan is being pummeled by sagging stock prices and pressured to undertake fundamental management reforms. At first glance, it would appear that big business is resisting change. Following a time-honored tradition, more than 2,300 companies listed on the Tokyo Stock Exchange simultaneously held annual shareholder meetings June 26. This practice originally was aimed at minimizing the opportunities for disruption by sokaiya (corporate extortionists), but during the past year, in particular, it has been criticized for not allowing stockholders sufficient time to question management's decisions.
STATE'S ALBRIGHT VISITS TOKYO TO EASE CONCERNS ABOUT WARMER U.S.-CHINA TIES by Eric Altbach
While President Clinton returned to Washington July 4 following his successful trip to the People's Republic of China, Secretary of State Madeleine K. Albright journeyed to Tokyo to reassure officials there that the U.S.-Japan alliance remains the cornerstone of U.S. policy in Asia. Her visit was designed to allay Tokyo's concerns that Washington's improving relations with Beijing might come at Japan's expense. Ms. Albright's supportive words found an appreciative audience among Japanese officials who have been subject to severe international criticism especially from the White House since the onset of the Asian economic crisis.
Riding roughshod over objections from the Clinton administration, Finance Minister Hikaru Matsunaga officially confirmed July 2 that the cross-market subsidiaries of Japan's big life and property and casualty insurers would be free come January 1, 2001 to sell the specialized or third-sector insurance policies that are the bread and butter of American and other foreign rivals operating in the world's second-largest insurance market. Spokesmen for the Ministry of Finance had indicated after contentious June consultations on Tokyo's follow-through of the December 1996 transpacific insurance pact that the government planned to end on schedule current safeguards on the marketing activities of the competition (see JEI Report No. 23B, June 19, 1998). In their view, Japan had earned this right by deregulating its mainstream life and nonlife insurance businesses in line with the agreement's requirements.