A John Kerry win may unnerve Japan’s economy

Traveling around Japan, one senses little excitement about the US primaries, though officials may be secretly hoping John Kerry doesn’t become president.

While the Democratic frontrunner’s economic policies are a work in progress, Japan may not like what it has seen so far. A Kerry win could spell renewed friction between Washington and Tokyo, the kind that may unnerve markets.

Tokyo-based economists are eyeing a couple of potential economic landmines listed in Kerry’s website, www.johnkerry.com. One is his push to get Japan, China and others to stop manipulating currencies. Another is his desire to break down barriers to key export markets like Japan and South Korea.

There’s nothing wrong with such positions, but the Bush administration has done far less than meets the eye to exact such changes from Japan. When it has spoken publicly on them, it’s been quite deferential toward Tokyo. Kerry might not be.

“Most changes in the US presidency are less disruptive to US-Japan relations than preelection posturing tends to suggest,” says Richard Jerram, chief economist at ING Securities (Japan) Ltd. “This time, in addition to the usual temptation to appeal to domestic lobbies, there is a foreign policy angle to the issue that could be bad news for Japan.”

It’s hardly surprising to see Democrats promising to protect jobs. Kerry, after all, is charging that George W. Bush “has the worst job record of the last 11 presidents combined.” That means James Carville’s 1992 edict, “It’s the economy, stupid,” is again front and center in Washington. Yet history suggests that regardless of who is elected in November, major disruptions in trade flows aren’t likely.

There’s a Japan-related wild card this year, however. While both the Bush administration and Japanese Prime Minister Junichiro Koizumi deny it, Asia investors have long suspected an economic quid pro quo for Tokyo’s deployment of troops to Iraq.

“In return for taking such a political risk,” Jerram argues, “it appears that criticism of Japan’s economic policy, including foreign exchange intervention, has effectively been ruled off limits.”

A conspiracy theory, perhaps, though supported by events last week in Florida, where the Group of Seven nations met. The US and the G-7 were notably reticent on the fact Tokyo spends hundreds of billions of dollars each year manipulating the yen. It’s widely believed the G-7’s calls for flexible exchange rates are aimed at China, not Japan.

Lest anyone disagree, Japan’s finance minister last weekend said the US agrees that Japan has a flexible exchange rate. Remarkably, he kept a straight face while doing it. Even moreremarkable, the US Treasury didn’t come out and deny that it shared a view with Japan that is just plain untrue.

Kerry’s battle cry, meanwhile, is the need for a new direction in US foreign policy.

If Kerry wins, Jerram notes, “it seems to follow that the implicit deal of economic concessions in return for political support would no longer be on offer. Most directly, that implies intolerance for exchange rate manipulation.’” He adds that “under President Kerry we also would have to consider the risk of a policy-driven disruption to exports.”

Japan has fared well during the Bush years. The Clinton administration had relegated Japan to second fiddle in Asia, opting to make ties with China its priority. Bush came to office determined to mend relations with Japan as a means of checking China, a nuclear power and nascent economic superpower.

The payoff came with Koizumi’s strong support for the US- led war on terror. Last month, Koizumi deployed troops, albeit noncombat ones, to Iraq. Japan hadn’t done that since World War II.

Asia’s biggest economy still has its problems, but it’s also supporting the US. Japan and China are huge buyers of US Treasury debt, which helps finance the record US current-account deficit and keep borrowing costs low. The US, it’s often said, has built a huge and productive economy, but Asia holds the mortgage.

Will a Kerry victory shake up this carefully choreographed economic alliance? It certainly could, and one also could argue some good might come from it.

Japan interprets silence from the White House as support for its policies. The country has years of painful restructuring to do before steady growth returns. Its banking system continues to malfunction because of bad loans and zero interest rates aren’t boosting consumer spending.

The White House shouldn’t bash Japan publicly, and the US has its own economic imbalances. Nor should it shy away from demanding that Japan do its fair share to create a healthy global economy.

Foreign pressure rarely works in pushing Japan to reform its under-performing economy. The Bush administration has given Japan too much of a pass on its policies, or lack thereof. The hypocrisy of demanding that China let its currency rise while saying nothing about the yen isn’t lost on Asia.

All roads toward getting China to scrap the yuan’s peg with the dollar may run through Tokyo. Only when Japan stops spending the equivalent of entire Asian economies to weaken the yen will China take seriously Washington’s desire for a stronger yuan. If Kerry can bring a fresh approach to all this, the global economy may be better off

As I predicted last September (about) here, after the election there will be tariff barriers against East Asian imports or their equal, for instance exchange rate floatation. Guys like Soros will be all over the RMB. The Europeans are champing at the bit. The multinationals will be expropriated by China, if not in name, in deed. No repatriation of assets allowed, period. Sic transit gloria mundi.

Kerry is not the man for the job. If he is elected he will do as Clinton did, and a bunch of Chinese cash will buy him off. Bush will actually get the job done, although by slow stages, as we have seen with the recent Greenspan statements responding to East Asian (Chinese) threats to unload dollar securities. Snow has been talking this way for some time. The program has been working very well, and it will be a great shame if it is not allowed to continue.

It’s widely believed the G-7’s calls for flexible exchange rates are aimed at China, not Japan . . .

You nailed it, friend. This is the dumbest understatement in the whole article. The Bank of Japan's attempts to keep the dollar from falling too far have seldom, if ever, been effective for very long. Meanwhile, the yen is fully convertible, freely traded and more stable than the other world currency with which Soros and his internationalist socialist bedfellows are in love with-- the Euro.

Soros would dearly love to do to Japan what he did to Malaysia, Thailand and Indonesia in 1998-- trash their currency and economies to benefit his ChiCom buddies. There was serious talk then of forming a super Asian currency based on the yen. Japan's own economic problems and the election of Bush put those talks on the back burner.

Soros is not popular in most of free Asia and neither are the politicians who lick his boots like John Kerry.

Smoot Hawley was half way back in time to the Civil War. Anyway, Smoot Hawley was no more to blame, and no less to blame, than Herbert Hoover for the Great Depression. That is, very little to blame. Probably the president most to blame for the Great Depression was Woodrow Wilson.

Besides, tariffs are no longer in fashion with the movers and shakers, as exchange rate manipulation is now the favored method of getting the same job done. East Asia uniformly manipulates their currencies' exhange rate in order to accomplish what tariffs did in the days of the gold standard, that is, to "protect" local "jobs" and "industry". I suspect tariffs won't even work under present monetary conditions.

Exchange rate manipulation is where it is at, for sure. That is why the east asians are happy to ship us manufactured goods in return for US dollar denominated GSE and other very moderate quality debt.

Thanks for the answer.
I once heard Milton Friedman state that if low value currency was the answer to trade, the hyper inflation leaders would also lead in exports.
Guess this is why Truman was looking for a one armed economist?

There is a lot of stuff happening all at once, a lot of motives in each human heart, lots of humans!

Industrialization seems to be collapsing here in the USA, but government can't make the country an exporting powerhouse unless the people want it that way. Examine the history of France, Colbert, mercantilism, all that. Every third world country has tried to increase exports through government command, and almost all have failed. Chile has made some progress, India, Thailand, and others with preferential access to US markets like South Korea and Taiwan.

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