Japan should focus on China, not the yuan

Posted in China , Asia | 10-Jan-04 | Author: Yoshihiro Sakai| Source: International Herald Tribune

Asian economies

NEW YORK - China has gained significant attention this past year as a potential threat to U.S. economic power. This was highlighted in September when Treasury Secretary John Snow failed to persuade China to appreciate its currency, the yuan. Following the U.S. efforts, Japan also intensified its criticism of China's currency policy. Some politicians and corporate executives in both China and Japan continue to argue for revaluation in order to eliminate China's export advantage.

However, with China growing in economic strength, I do not believe that Japan should follow the United States in calling for appreciation of the yuan at this time. Japan's relationship with China is too important. The United States used its superior economic position for its own benefit in 1985, when Japan agreed to let the yen appreciate under the Plaza Accord. The yen appreciated more than 60 percent against the dollar. That did not reduce Japan's trade surplus, but ever since, Japan's economy has been negatively impacted by the decision to revalue the currency and to partly change its economic structure.

Well aware of Japan's misfortunes, China is remaining strong against any appreciation of its currency. In fact, China has given serious consideration to the introduction of a floating exchange rate and opening its market to foreigners in the future, but Beijing feels that it is more urgent now to create orderly financial and capital markets, to clean up bad loans and to resolve other internal problems.

Although the Japanese government has also asked China to revalue the yuan, the argument between the United States and China should not influence the relationship between China and Japan. China is too important a trade partner, with exports and imports increasing four-fold in the past decade.

Until recently, Japan had too much confidence in itself. When the yen appreciated in 1985, Japanese companies set up operations in Asian countries, but Japan could not contribute enough to these countries, and used them only for their cheap labor. They, in turn, failed to develop robust financial systems. This is one reason that the Asian currency crisis could not be confined in 1997 and 1998, and also reached Japan. China avoided the crisis due to its tight market regulation.

The Asian turmoil taught Japan that prosperity and economic stability in neighboring countries is necessary to Japan's own growth. Thus geographically and economically, Japan, along with China, must form an Asian economic zone with the idea of co-prosperity.

This is more important for Japan than for the United States, since China is a close neighbor of Japan and an important member of the Asian economic zone. China's gross domestic product of $1,240 billion in 2002 is 31 percent of Japan's gross domestic product. Southeast Asian countries, including China, account for 54 percent of Japan's gross domestic product volume. In comparison, Latin American countries' gross domestic product account for only 15 percent of the United States' gross domestic product, and East Europe accounts for 8 percent of the EU's gross domestic product. Furthermore, the Asian economic zone's economy increased more than 7 percent annually on average in the last decade, led by China. The trade volume of the Asian economic zone is now 17 percent of the total trading volume in the world - larger than the share of the United States.

In comparison to the potential growth of the Asian economic zone, and in particular China, the revaluation of the yuan is insignificant. Japan has a chance to regain its previous economic status if it continues its strong relationship with China and builds a solid partnership in the Asian economic zone.

The writer is a managing director of Nomura Securities International and an adjunct fellow at the Center for Strategic and International Studies in Washington.