[OPE] Jim O'Neill on Japan's economic hernia

"Should the yen not be closer to Y195 than Y95?"
http://www.ft.com/cms/s/0/b443287e-81cd-11de-9c5e-00144feabdc0,s01=1.html

In matters of investing and especially international exchange rates, Jim
O'Neill is the "real McCoy". When you are responsible for that much dough,
you have to be real good.

But, if I may humbly ask - as rank amateur in these things - what do the
household savings he mentions have to do with the issue, except for the
carry trade influencing the exchange rate to some extent? David W. Campbell
and Wako Watanabe report in a paper that about 12% of Japanese households
account for 75% of total positive saving, 75% of total negative saving and
75% of total net saving. They say "These conclusions reinforce the
hypothesis that the savings process in Japan is not distinctive, and
highlight the importance of research on the heterogeneity of saving
behaviour." Yeah.
http://www3.interscience.wiley.com/journal/119029443/abstract?CRETRY=1&SRETRY=0
A Marxian scholar is of course inclined to introduce the "class dimension"
into the picture.

Looks to me like there's not too little capital in Japan, but too much, but
most Japanese haven't got it, and therefore they cannot affect the Yen
exchange rate very much. There are wonderful stories about Japanese
housewives investing in faraway places, but the total amounts involved there
are not all that significant for the Japanese economy as a whole (I cannot
find good data on the percentage of total foreign claims just now, sorry).
If the top quintile starts to sell off a lot of Yen, a sort of stampede or
capital strike, yes, then the price of the Yen would obviously fall. But
what exactly would motivate this, and what currency would they buy? Most of
the trade is with the US, Euroland and the Carribbean (Caymans etc.).
Effectively we would be saying that the Japanese elite no longer had any
confidence in their own country. I do sense a somewhat gloomy, cynical
atmosphere there, but not a total loss of confidence. The people's bitching
is mainly about the political process, and the difficulty in finding a
common denominator that gets people "on side". In the fractured political
scene, Mr Yoshimi Watanabe is setting up a new party, for example.
http://search.japantimes.co.jp/cgi-bin/nn20090806a4.html

Actually, in modern business, corporations don't raise very much capital
from household savings, that is just a neoclassical textbook myth about
capital formation (see my simple comment in wikipedia, if you wish
http://en.wikipedia.org/wiki/Capital_formation#Controversy ). The future of
the Yen is probably more linked to the ability of Japanese business to
restructure operations, and how exactly they go about that. I wouldn't
underestimate their adaptability in this sense, by any means.

The "deep structure" of Mr O'Neill's argument seems to be - if I am
correct - that if you want to get out of a recession quickly then, although
this may be painful, you have to flexibilise everything, especially the
labour market. You get rid of fusty seniority systems, you lay off a lot of
people, so that you can sanitize the accounts, and then you can rehire
people much faster, than if you let things rot by having people on the
payroll that don't contribute anything much to output and corporate
earnings, raising debt burdens. You have to use that scalpel, even if it
makes you unpopular, because if you don't, the disease gets worse.
Economists admire the "tough" US in this sense, because US workers have very
little clout at all - if the boss says you are down the road, you are down
the road, maybe the next day even. But the enthusiastic firing of workers
actually fuels the recession as well. You might think of this as a "musical
chair dance", until you find all the seats are taken and you are out of the
dance. Many people will be, durably.

The trouble with this underlying economic argument is political, i.e. that
we are talking about real people's lives, and, apart from the additional
financial stress of unemployed people who cannot pay their bills, if they
are rehired, it is usually on a lower salary and benefits than they had
before. The total bill of mass unemployment to society (direct and indirect
costs to individuals, business and the state) is simply very high. More
likely, the answers are to be found much more in the way that the work
itself is organized, and the forms of association - typically, a work style
is adopted by management because they think it improves productivity, it
becomes a dogma, but in the end it is scrapped again, in favour of a new
work style. The Japanese are certainly leaders in this field. In politics,
fact is you have sticks and carrots, but if there are only sticks, and no
carrots, you aren't much further ahead - if the present pains are not
clearly related to future gains, it is difficult to get people to follow
your plan. Plus, of course, modern "financial wizardry" installs in people
the habit that you try and shift the costs to someone else, somewhere else,
notwithstanding many odes to private initiative.

As said, my impression from the data I've seen is that the Japanese
population holds a large amount of idle funds doing nothing much except earn
interest, and that's the core of the problem. International capital traffic
can then affect exchange rates strongly, without however necessarily
affecting economic fundamentals very much at all. The shorter term movements
of the exchange rate do not tell us very much about the productivity or
profitability of the workforce these days.

This leads me to my last quibble, which is that Jim O'Neill surprisingly
doesn't really provide a timeframe in his article for his evaluation. I'm
not a banker myself, but if you are a banker, time is everything, no
forecast is any good in banking without a clear time reference. So the
question is really within what timeframe you could say that the Yen is
overvalued or overrated? Shortterm? Mediumterm? In historical perspective?
He provides no clear answer to this, and so, I think that before one pulls
one's nose up at the Yen, we'd better first try to unpack a bit more what
the data can tell us. If I only had the time... but right now, I have to
sort out my own admin. I cannot devolve this task to someone else...

Jurriaan

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Received on Thu Aug 6 17:13:26 2009