Why is the US taking the currency issue off the table in talks with China?
Treasury Secretary Paulson apparently plans to shift the focus of the Strategic Economic Dialogue away from the renminbi.
John Brinsley and Li Yanping of Bloomberg report:
“The currency issue is pretty much off the table,” said Donald Straszheim, who monitors Chinese economic issues as vice chairman of Roth Capital Partners, in Newport Beach, California. “The currency appreciation has clearly helped everyone concerned.”
Straszheim’s quote is consistent with the background noise coming from the Administration. Brinsley and Yanping:
“U.S. Treasury Secretary Henry Paulson’s semi-annual talks with Chinese officials will focus on energy and the environment as a rising yuan eases the exchange- rate tensions that marred past meetings.”
Energy is important. But I think shifting the focus away from the exchange rate is a mistake.
There is little doubt that RMB’s appreciation against the dollar — together with the US slowdown — has led to the stabilization of the US trade deficit with China. But that deficit remains large absolutely. Not growing isn’t quite the same as falling.
More importantly, though, the US shouldn’t be focusing on the RMB-dollar. It should be focusing on the broad nominal value of the renminbi. And on a broad nominal basis, the RMB hasn’t really appreciated. The RMB has slid against the euro over the same period when it has appreciated against the dollar. That has led to a reallocation of the basis of Chinese export growth away from the US toward Europe. The real renminbi — a measure that includes inflation differentials — is basically where it was in 2000, with most of the appreciation coming from an acceleration in Chinese inflation rather than a rise in the renminbi.
The fact that it hasn’t fallen along with the dollar since 2005 is welcome. But not falling at the same pace as the dollar is a low bar. The RMB should be a lot higher, particularly against European currencies.
Between 2004 and 2006, US officials often complained that European officials wouldn’t join them in putting pressure on China to let the renminbi appreciate. The US now seems to be returning the favor, and ignoring Europe’s growing concerns about renminbi weakness. Rather than taking credit for renminbi appreciation against the dollar, the US should — in my view – continue to emphasize the importance of broad renminbi appreciation against a basket of the currencies of its trading partners.
On a broad basis, the renminbi remains significantly undervalued. That is what China’s still strong export growth and enormous reserve growth tells us.
Stephen Green of Standard Chartered forecasts that China’s current account surplus will stay constant in nominal terms in 2008 (that implies that it will fall relative to China’s GDP). That isn’t good enough. A constant Chinese surplus in the face of an enormous rise in the surplus of the oil exporting economies implies a larger increase in the nominal deficits of the other oil-importing regions of the world economy. The US deficit isn’t likely to fall in nominal terms if oil stays at its current levels. But it isn’t going to rise as rapidly as in the past either.
The burden of adjustment is being shifted to Europe and to some smaller Asian economies that import oil and compete with China in the export market. The world would look much different if the rise in oil prices was bringing China’s surplus down. Then the country with the largest existing surplus would be clearly participating in the adjustment. If oil falls back, at current exchange rates, I would expect China’s surplus to resume its growth. China seems to have slowed the pace of renminbi appreciation against even the dollar recently. I don’t yet see signs that China has really reoriented its economy away from exports — as opposed to reoriented its economy away from exporting to the US and toward exporting to Europe and the oil-exporting economies.
And yes, I recognize that China has its own concerns about US policy. But the right response to China’s concerns about dollar weakness continues to be that the US did not think it made sense for China to link its currency to the dollar at an undervalued exchange rate to begin with. I will have more on the important New York Times story later.
The currency issue is off the table because everyone got what they wanted. Textile manufacturers got an extension of the multi-fiber agreement. Wall Street got access to Chinese financial markets and relaxation of capital controls on outflows.
The currency issue was just a bargaining chip that has outlived its usefulness. In particular, if the RMB rises too sharply, interest rates will rise creating a recession in an election year and that’s the last thing that incumbent politicians want to see.
Brad,
The administration appears to have adopted a strong-dollar policy, even viz-a-viz the RMB. This is really quite incredible.
Perhaps the Bush administration believes the position taken by Don Boudreaux in an exchange of letters-to-the-editor that I have been having with him on the Washington Post editorial page.
1. On June 6, a letter to the editor that I wrote was published in the Washington Times ( http://www.washingtontimes.com/news/2008/jun/06/letters-to-the-editor-17425567/ ). This is what I wrote:
Balanced trade is the key
In his Tuesday Commentary column, “Economic Reality Check,” Michael Barone cites many trees but misses the forest. He points out that the economy is not suffering from much unemployment (true), nor is there much inflation (true). Nor is the economy shrinking (true). He also points out that the growth rate is mighty slow, but he doesn’t stop to analyze why. His conclusion: Barack Obama’s “protectionism” would not help the United States economy.
What he misses is the reason U.S. growth is so slow despite the lack of unemployment. It is slow because businesses have not been investing in American production. They have not been investing because they know that if they do, the mercantilist countries that control our level of trade deficits through currency and other trade manipulations will simply drive them out of business. The key to fixing the problem is for the United States to insist on balanced trade.
By the way, Mr. Barone is wrong when he calls Sen. Obama a protectionist. Mr. Obama would not likely do anything more to balance trade than Sen. John McCain. The main reason Sen. Hillary Rodham Clinton was solidly defeating Mr. Obama throughout the Midwest is because the manufacturing voters detected a phony.
As things stand, the Democrats will gain a huge victory in Congress of 1932 proportions as a result of delusional Republican economics as exemplified by Mr. Barone’s column. The presidential race, however, is up in the air. Ohio, Michigan and the nation will go to the presidential candidate who persuades voters that he will do the most to balance trade.
HOWARD RICHMAN
Co-author: “Trading Away Our Future”
Kittanning, Pa.
2. On June 9, Don Boudreaux responded with his own letter to the editor ( http://www.washingtontimes.com/news/2008/jun/09/letter-trade-deficit-offset/ ). Here is what he wrote:
Trade deficit offset
Howard Richman argues “Balanced trade is the key” (Letters, Friday/Saturday) to America’s prosperity. He’s confused, as evidenced by his claim that America’s recent economic slowdown is linked to its trade deficit. The United States has run a trade deficit for each of the past 31 years, some of which (like the present) were periods of slow growth, but many of which were periods of high growth. Indeed, the evidence suggests that higher trade deficits are associated with higher, rather than lower, rates of economic growth.
This last point highlights another of Mr. Richman’s confusions. He thinks trade deficits mean less domestic investment. Not so. Every trade deficit (more accurately, current-account deficit) is offset exactly by a capital-account surplus – meaning net inflows of capital into the domestic economy. More capital generally means more growth.
DONALD J. BOUDREAUX
Chairman, Department of Economics
George Mason University
Fairfax
3. Today, the Washington Times published my response to Boudreaux’s letter ( http://www.washtimes.com/news/2008/jun/17/how-to-grow-the-economy/ ) Here is what I wrote:
How to grow the economy
In a June 9 letter to the editor, “Trade Deficit Offset,” Don Boudreaux, Chairman of the Department of Economics at George Mason University, disputed my contention in a June 6 letter to the editor, “Balanced Trade is the Key,” that U.S. investment would increase if we insisted on balanced trade with the mercantilist countries.
Specifically, Boudreaux argued that our trade deficits contribute to our economic growth: “Every trade deficit (more accurately, current-account deficit) is offset exactly by a capital-account surplus – meaning net inflows of capital into the domestic economy. More capital generally means more growth.”
Boudreaux’s theory works on the chalkboard of his classroom, but in the real world, the exact opposite occurs. Instead of helping, inflows of financial capital slow the growth of the economy that receives them. In 2006 three International Monetary Fund economists (Prasad, Rajan & Subramanian) found that the more capital a developing country had received from abroad, the slower its economic development because of the harm to its exporting industries. Although the inflow of capital causes lower interest rates, it also causes a higher currency value which makes the products of that country less competitive in world markets.
Many Asian countries, especially China, have been intentionally manipulating their currency values to keep their exports high and their imports low. In order to conduct these currency manipulations they buy dollars and lend those dollars to the United States. Boudreaux thinks that this inflow of dollars from the Chinese government has been benefiting our country. But the inflow of capital into the United States drives down U.S. interest rates while at the same time putting U.S. producers at a competitive disadvantage when competing with Chinese producers.
As I pointed out in my June 6 letter, “businesses have not been investing in American production … because they know that if they do, the mercantilist countries that control our level of trade deficits through currency and other trade manipulations will simply drive them out of business. The key to fixing the problem is for the United States to insist on balanced trade.”
Howard Richman
Co-author: “Trading Away Our Future”
Kittanning PA
Howard Richman
http://www.trade-wars.blogspot.com
Whoops, I meant the Washington *Times* editorial page not the Washington *Post*
Senior Chinese officials scold US government for Economic Mismanagement
http://www.iht.com/articles/2008/06/17/asia/17china.php
Chinese officials seem to be galled by the apparent hypocrisy of Americans telling them what to do while the American economy is at best stagnant. China, on the other hand, has maintained its feverish growth. Some officials are promoting a Chinese style of economic management that they suggest serves developing countries better than the American model.
In the last six weeks alone, a senior banking regulator blamed Washington’s “warped conception” of market regulation for the subprime mortgage crisis that is rattling the world economy; the Chinese envoy to the World Trade Organization called on the United States to halt the dollar’s unchecked depreciation before the slide further worsens soaring oil and food prices; and Chinese agencies denounced a federal committee charged with vetting foreign investments in the United States, saying the Americans were showing “hostility” and a “discriminatory attitude,” not least toward the Chinese.
“U.S. credibility and the credibility of U.S. financial markets is zero everywhere in the world,” said Joseph Stiglitz, a professor of economics at Columbia University who has sharply criticized the Bush administration and praised China’s economic management in the past. “Anybody looking at this from the outside says, ‘There’s been a lot of hot air coming out of the U.S., so why should we listen to these guys when they didn’t know how to manage risk?’ “
All of this mess is related, and it starts with bad US economic policy. And blaming the Chinese is provoking a political backlash from Beijing. There is little doubt that the “cheap money” monetary policy by the Federal Reserve is responsible for higher energy prices and rising inflation. Bad interest rates policy compounds the problem. Inflation is a government sponsored tax that benefits those with first access to money (banks and the wealthy that the corrupt Bernanke Fed exclusively panders to).
Dr Setser,
I wonder if, in your deep knowledge of CBs assets holding you mentionned the key role enlargment of eligible collateral lists to money markets operations could play…
In particular, ECB seemed to enlarge eligible collateral early 2007 to non-marketable assets like credit claims (ie ABS ?).
Here follows first 6 month review with this experience on ECB Web site :
http://www.ecb.eu/events/pdf/conferences/es_collfm/credit_claims.pdf
1. First question : Please could you provide your opinion on main CBs eligible collateral policy/list on the “fair value” of their holdings ? (Fed, ECB, BOe, BoC, Boj ?)
This question seems crucial relating to recent attemps by US wholesale banks (think Merryl ?) to unload through SPVs tons of their dirty CDOs/CLOs… onto Fed’s Balance sheet….
2. Second question ? On your point of view, What could be the impact of these new attemps to “put some lipstick on the pigs” by market players (in case they succeed) on main CBs holdings and the total amount of “real” assets they hold ?
Thanks,
Geoffroy de Pierrepont
Here are Prashad’s results
http://www.imf.org/external/np/speeches/2006/082506.htm
So far, we have looked just at non-industrial countries. The table in the next slide suggests when we include industrial countries to see if the association between current accounts and growth is different for these two countries, we find that indeed that is the case. The correlation is negative for industrial countries (a 1 percentage point increase in the ratio of the current account balance to GDP decreases growth by 0.14 percent per year); while this correlation is positive for both emerging markets and developing countries.
If Prashad is right, then the current situation of China exporting capital to the United States happens to be the one that results in the highest overall growth.
Howard Richman — comments should be comments, not posts.
2fish –
certainly there was a correlation between the rise in CB reserves, the rise in EM financing of the US and the rise in global growth between 02 and 07. I would argue though that this growth was bought at a significant price, one that is already visible in the US – where a financial crisis has slowed growth to zero after a expansion that failed to raise median real wages. And China will eventually take an enormous financial loss on its dollar reserves (a loss that is currently hidden and has yet to be fully incurred) — and arguably its current investment boom borrowed from the future too, so it could experience a future investment draught that pulls down its growth. The fundamental basis for this expansion has always struck me as weak.
The only measure that gets results are tariffs
Without tariffs there is no stick with which to manifest swift and efficient trade policy.
Unfortunately so many of our multi nationals produce in China for the American market that it wouldn’t wash politically in this administration.
It is time to quit the WTO, put corporations in their place and use bilateral trade with tariffs.
Rather than imposing tariffs, I would rather see the US push China to allow the RMB to appreciate to a level where the PBoC does have to intervene in a sustained way to avoid further appreciation. That is why I think it is a mistake to stop pushing on RMB appreciation just when RMB appreciation shows signs of having an impact on US-Chinese bilateral trade, especially in a global context where the RMB hasn’t appreciated in nominal terms against a basket of the currencies of its major trading partners after 2005.
bsetser 2:31 pm ~
The United States will never get serious about pushing China as long as so many of our multi nationals make product for export here. It just isn’t gonna happen.
China is playing the same currency manipulation game that has worked so well for Japan.
What we need are tariffs. What every country needs are tariffs. This is the only way domestic interests have a chance against the multi nationals and the WTO.
National interests need to take on the multi nationals. What we are seeing are corporate rights trumping the Common Good time after time in country after country. Even the United States, the richest, most powerful country in the world is seeing its national interests subjugated by the money corporations can muster for political patronage.
Why would it be in China’s national interest to significantly revalue its currency so that Chinese exporters are priced out from 3rd economy markets including Southeast Asia and the Middle East? Contrary to US perceptions, the American market is no longer even the largest and most important economy for Chinese exports; the Europe is the biggest trading partner for China, and inter-regional trade volume has long surplanted trans-Pacific ocean trade. A revaluation of the China yuan has consequences that go well beyond bilateral sino-US relations that usually hingers on America’s xenophobic political atmosphere. A stronger yuan would further accelerate the downsizing of the labor intensive Chinese textile industry. It’s an absolute “no brainer” that the Chinese government will rebuff any unreasonable US demands to accelerate the revaluation of the yuan. The yuan is already revaluating at the fastest pace possible without jeopardizing the economic stability of the Chinese economy. Before bashing the Chinese, the US should concentrate first on getting its own house in order starting with the dysfunctional subprime US banking system.
Dave Chiang 2:56 pm
China’s refusal to let the yuan float has lead to increasing inflation within China.
As for the United States, we need tariffs to mitigate the manipulation of the yuan by the Chinese authorities. It is their right to do with their currency as they wish, but it our right to pursue a trade policy in our own best interests.
Do you think it’s possible that the strength of the RMB might “flip” sharply, that, as has happened in say South Korea, the central bank may have to switch gears from restraining appreciation to preventing depreciation?
You write, “On a broad basis, the renminbi remains significantly undervalued. That is what China’s still strong export growth and enormous reserve growth tells us.” The next question, though, is how volatile are these two markers of strength. You and Michael Petits have done a great job of arguing that there’s been a sharp spike in speculative inflows. RMB/USD, and more recently RMB/EUR, have looked like a one-way bet for a long time, but there’s always the hazard that one-way bets eventually become wrong-way bets if you don’t get in early enough. If the reserve growth is largely “hot money”, there might be legitimate concerns about a speculative bubble popping. If oil prices don’t moderate but Western demand growth does (not just US, but European too), how likely is it that China would swing into deficit? And then would all that speculative money want out?
I’m not arguing that, since there is a balance of hazards, RMB is “correctly valued”. I don’t think that at all. With a weak RMB/EUR, Europe may end up shifting to deficit and watching its tradables sector weaken, which I view as terribly harmful. But after years of misvalauation and reckless monetary expansion, I’m not sure it’s possible to arrange a stable, gradual adjustment via appreciation. If there is a one-and-done sharp move, speculative money will want to take its profits out of China, putting downward pressure on the RMB. And if expensive oil, weak customer demand, and growing protectionism conspire to put pressure on China’s surplus, investor sentiment may turn sharply about an economy in an inflationary spiral with no history of protecting RMB purchasing power with politically painful tight money.
Of course, two (is it really two?!) trillion dollars in reserve assets would be a nice insurance policy in ordinary times, but while the US was happy to stand by as PBOC slashed US interest rates, should China stop buying or start selling, the American (or European) response might be less benign.
I think it just might be too late. Maybe the reason why US policymakers are laying off the currency, and why even European leaders seem restrained, is because they know the status quo is very fragile, and even those who don’t much like it are afraid to see what comes next.
Sorry to go on so long…
DC — uh, China has been gaining market share from others emerging economies. And China’s current pattern of growth is remarkable for the absence of much job creation; a revaluation should be combined with other policies — how about a program to rebuild schools to increase their resistance to earthquakes? — to create jobs. a new policy mix would like increase not decrease job growth from its current paltry levels (relative to China’s growth). And the argument that China is appreciating as fast as is possible doesn’t fly when China’s currency appreciated far more (relative to a broad currency basket) in the 90s and for that matter in 2005.
Steve — I suspect that (overstated) worries about fragility are part of it; the US also seems to be pushing the Gulf to stay pegged to the dollar so there is perhaps a broad decision to push for $ strength across the board, not just vis a vis Europe. Adjustment is thus being relegated as a policy goal.
Another interpretation is that Paulson cares far more about financial market access than RMB appreciation — and thus he has kept up the pressure on financial liberalization while easing up on RMB appreciation once China moved enough (and congress proved divided enough) that the threat of congressional action went away. Paulson’s first speech on china suggested to me a much stronger focus on getting market access for US banks and i-banks and PE firms than on the RMB.
as for the risk of a big swing that puts pressure on China to let the currency to depreciate, I don’t see it coming from the BoP. it might come from a big slowdown in investment and China’s economy that makes China more desirous of export growth than it is even now. But I don’t quite see how flows could reverse on a scale large enough to really end the underlying pressure for appreciation.
Here is why — unlike the Asian tigers in the 90s, China has an enormous current account surplus. for 07, it was $370b, or about 11% of GDP. China is also attracting north of $100b of FDI. Some of that is disguised hot money, but not all. Say the underlying inflow from the basic balance of payments is now in the $450-500b range — or around 15% of China’s GDP. To end the need to intervene, “hot money” outflows would have to rise to that level — and that would be absolutely huge. Basically it would take a swing in such flows on an Asian crisis scale just to end the need to intervene to keep the rMB from appreciating. And China could accomodate a bigger outflow by dipping into its reserves.
Now you can argue a one-time reval would prompt big speculative outflows while reducing the basic BoP surplus. But i rather doubt the trade surplus turns on a dime — a reval will also lead to higher $ prices on Chinese exports and some J-cruve type effects that push up $ revenues in the short-run. I see a much bigger risk that China adopts a one-time reval that is too small to change expectations than that it will adopt a reval that is so big that it prompts a huge fall in the surplus and big speculative outflows.
Maybe Paulson is more in tune with the financial services industry in NY than with manufacturing in the rustbelt.
US political cycle timing plays into the Fed’s hand in terms of the tradeoff between mortgage ARM resets and the timing of actual action on monetary policy. Mortgage resets are the primary monetary policy transmission sensitivity for the real economy at this point. The benefits of remaining at the current Fed funds rate for the next 6 months are considerable in this regard. Bernanke’s recent speech/statement on the dollar was targeted at inflation expectations, playing into the buffer of lead time, since inflation expectation risk doesn’t move and is not observable on a dime.
The Fed is in the driver’s seat in terms of putting the screws on funds tightening expectations, while still delaying the start of the actual tightening cycle until January 2009. In the meantime, the treasury curve remains robustly positive in anticipation of the first move. The Fed will encourage that tension, as they have been doing through various speeches pointing to the dynamics of the trade-off.
And global currencies and capital flows will be hypersensitive to the first 50 basis points or so. It won’t take much to strengthen the dollar considerably.
And China will be freer to move post-Olympics.
A quasi-coordinated Fed funds and PBOC exchange rate tightening in early 2009, each of surprisingly limited extent, might do wonders for global adjustment.
Perhaps the timing is being negotiated.
The fact is that China is not going to give the US and the EU presents on currency as long as the West puts no pressure on Japan to stop arbitrarily killing their currency to benefit their export conglomerates and keep the carry trade going. Talking about the need for substantive RMB appareciation without including yen in the mix is futile. That is a power game that most Western observers seem completely blind to.
Beijing, while grudgingly increasing appreciation, clearly showed that this was the case, both in words and in action, after the G8 meeting last July where everyone ganged up on them, and their “LOOK at Japan!” pleas were completely ignored. http://quotes.ino.com/chart/?s=FOREX_USDJPY&v=dmax
It is no coincidence that real RMB appreciation has stopped simultaniously with with yen dropping again.
Glen: West puts no pressure on Japan to stop arbitrarily killing their currency to benefit their export conglomerates and keep the carry trade going.
I worry a lot about the yen carry trade. Whenever I think about the yen carry trade, the words “ticking time bomb” come to mind.
Glen- I fail to see how Japan is “killing their currency”. Any USD/JPY buying is from the private sector, and even if you want to side with conspiracy theories government buying is not even remotely on the same magnitude as SAFE. It isn’t clear that interest rates are very out of line either given the growth and inflation dynamics. There really isn’t much demand for funds in Japan (in contrast to China where quantitative loan controls have spurred an underground financing market outside the PBOC’s purview). Keep in mind that given Japan’s state of development and demographics it should structurally have a large current account surplus. However, the same analysis arguably suggests China should structurally run a current account deficit.Japan’s C/A surplus is 3% of GDP, vs China’s at 11%. I think it’s very clear who is doing the vast majority of exchange rate manipulating here.
sharpe_mind: Keep in mind that given Japan’s state of development and demographics it should structurally have a large current account surplus. However, the same analysis arguably suggests China should structurally run a current account deficit.
I would think that it should work the other way.
China, as a young developing nation, needs to run large current account surpluses in order to save money in other nations with higher productivity. Japan is an old developed nation and needs to run large current account deficits to pull in money to pay for an aging population.
Apologies in advance if this is too long.
Sharp mind wrote: “It isn’t clear that interest rates are very out of line either given the growth and inflation dynamics.”
Not if you actually believe the Japanese inflation figures ofcourse…. but you shouldn’t. Not anymore than you should consider the US figures a fair representation. BoJ even argues that the increasing energy and food prices have not caused more inflation in Japan. How would that be possible when they are major net importers?
Japan owns three and half times as many US bonds as China does. The mechanism we know. Keep you own currency down while enabling the US to spend. Why would that work different from what we see from China? Contrary to China, they do their damnest to keep rates at an ahistoric minimum, well below the real rate of inflation to insure that the yen stays down.
When yen drops, Nikkei shoots upwards, companies make profits and despite these profits they point to the low domestic growth as a sign of an ongoing depression, slashing wages and cutting down the middle class spending power, just as the Japanese government cuts social services. The population is aging, sure, but it goes way beyond that.
It is a designed ‘repression’ that affords the financial and industrial elite in Japan bigger corporate profits than they ever had in the booming 70s-80s. You need not be a conspiracy theorist to put two and two together if everyone at the top is raking it in at a time of ‘crisis’.
Reason that noone wants to do anything is because our Western banking establishment and financial elites are far too happy making free money and getting the tools to hyper leverage crap investments through the carry trade. Its why Twofish is absolutely correct in saying “time bomb”.
As much as the US has quite a few things to sort out back home, as much as China can contribute to realigning world finances etc. etc. there’s no solution without looking at Japan also, IMO.
Paulson has always said just enough about currency (never using the word “manipulation”) to satisfy certain journalists and Congress. I don’t think currency has ever really been the focus of the Strategic Economic Dialogue. The emphasis is on the strategic part – big power stuff and how the two converging giants can cooperate, hence the attention on energy and essential need to figure out a way to share the world’s oil resources.
Sinomania: I am not sure how the giants are converging — apart from in their usage of energy. Us external debt is rising; Chinese external assets are rising — their net debt positions are thus diverging.
I suspect Paulson has focused far more on opening up Chinese financial sector to US/ european investment than on the great power stuff, but otherwise agree.
all — JPY appreciation keeps running into a wall when Japanese growth stops. i would hope tho that the volatility in the yen dollar over the last year has reduced the size of the time bomb.
bsetser Says: “JPY appreciation keeps running into a wall when Japanese growth stops. i would hope tho that the volatility in the yen dollar over the last year has reduced the size of the time bomb.”
You can only mention “growth runs into a wall”, if you seriously believe that Japans policies are actually geared towards enabling growth among its middle class. I don’t believe that anymore than I believe Bush’s tax cuts favors Joe Average over Joe Billionarire III. You cannot have sustained growth if you take away domestic consumption entirely.
When there’s a massive trade surplus, massive corporate profits for five-six years straight yet still declining real wages, massive manipulation of inflation stats to legitimize near zero interest rates and a perpetually weak yen, then something is quite obviously off. With all this the Japanese middle class population is getting progressively less able to spend on anything , least of all imports from the US or Europe.
Look at Japanese import/export ratios to the US and Europe! It is much, much, much more onesided than China’s, and in Japan’s case it isn’t predominantly low-tech goods where US (and international) companies eventually get alot of the profit. It’s cars and high tech value added products that directly outrivals US (and European) manufacturers.
It is a deliberate distortion of trade as well as the overall state of the Japanese economy. It benefits all the conglomerates and families who have run Japan for ages. Not its general population.
Japan is a lean, efficient, productive hi-tech machine and the biggest creditor nation on the planet.
The only explanation that noone wants to tackle this monstrousity of an imbalance machine (as the carry trade and 0,5 percent interest is) is that too many with too much influence is making too much of a killing off of it.
China on the other hand refuses to play that kind of ball, and that is why they make agreements that forces Japan to buy products from them as well as make technology transfers. We in the West are just a wee bit more stuuuuupid, it seems.
One major factor in the lack of growth in Japan is that people aren’t more angry than they are. Growth in Japan isn’t spectacular but people are comfortable and there doesn’t seem to be any popular pressure to rock the boat.
Both US and China have populations that are very nationalistic and very competitive and any government that allowed the economy to stagnant in the way that Japan’s has would have been removed from power long ago.
As far as why no one gets upset in the West, I think it has to do with the fact that no one influential gets hurt by Japan’s current policies.
Twofish wrote: “One major factor in the lack of growth in Japan is that people aren’t more angry than they are.”
Yeah. I’ not a scholar on the issue, but I don’t think Japan has much of a history of popular revolt. Whereas any Chinese Government fears that more than anything, it seems that apart from the Shimabara rebellion back in the 1600s where more than 30.000 rebels were ultimately beheaded, Japan’s various rulers haven’t had those kinds of problems all that much. When they have, rebellions as far as I know have ultimately been ruthlessly crushed.
“Growth in Japan isn’t spectacular but people are comfortable and there doesn’t seem to be any popular pressure to rock the boat.”
I think that is only half true, which is an essential part of my saying that the ‘depression’ is a designed one. There’s certainly many with reason to be comfortable, but I was there for research last month. There’s tremendous popular discomfort in Japan today while the elites and upper middle class are raking it in.
One measure is the rash of suicides brought on by debt and the seniors inability to pay for medical services.
http://www.hindu.com/2008/06/21/stories/2008062156562000.htm
“As far as why no one gets upset in the West, I think it has to do with the fact that no one influential gets hurt by Japan’s current policies.”
In the short term, no. Indeed as I said rather than being hurt, they are making a killing. But there will be a time where the carry trade stops for good, and then there’ll be bills (or hell) to pay.