PRESIDENT Clinton's recent decision to intervene in the foreign-exchange markets to stop the yen from rising to the 100-per-dollar mark is to be applauded.
Many economists have been arguing that the only way to dent Japan's trade surplus is to have a rising yen, and if a high yen is good then an even higher one is better. This argument has some merit, but this year the yen has already risen 20 percent; over the last two years the currency has appreciated almost 30 percent. Given the fragile state of the Japanese economy, the threat of still more short-term appreciation risks creating a new recession.
Japanese growth in 1993 will hardly reach 1.5 percent, less than half the amount forecast by Tokyo a few months ago. The outlook for 1994 is decidedly gloomy: Consumers are nervous because jobs are becoming vulnerable, and corporate profits are falling as the yen soars.
Japan's shaky economic performance is having an increasingly negative effect on the world economy. In one of the most dramatic changes in the international financial scene, over the past five years Japan has changed from being a massive exporter of long-term capital to a major net importer of long-term capital. As the domestic economy lost steam, Japanese banks literally stopped lending abroad as earnings fell. Consequently, Japan has invested more and more of its trade surplus in passive short-term financial assets, including United States government securities. This may help marginally to reduce interest rates, but it does not stimulate global spending in any positive way compared with Japan's investments during the 1980s. As a result, the benefits to the US and to the rest of the world of a yen that is appreciating too rapidly are more than offset by slow growth and the cut in Japan's long-term capital exports.
What is needed is higher growth and the cut in long-term capital investments abroad as the trade surplus gradually is reduced. Stabilizing the yen provides a breathing space. It is hoped that Mr. Clinton has secured a promise from the Hosakowa government to cut taxes and raise government spending as a part of an overall agreement. If not, the pressure on the yen will soon build up again.
THE president's move represents a refreshing change in recent international policymaking, where over the last two years or so governments and central banks have put more emphasis on long-term goals than on short-term growth.
In the European Community, for example, governments decided that using high interest rates to hold the exchange-rate mechanism (ERM) together was more important than encouraging economic growth. Even as the ERM rapidly becomes a memory, governments are only grudgingly reducing interest rates when good sense clearly suggests boldness. Similarly, the emphasis on cutting budget deficits in many countries could lead to prolonged recessions. The net result is that 1994 will very likely be the fourth year of less than 2 percent growth in the Organization for Economic Cooperation and Development, the worst performance since World War II. If Japan were to slide into recession, industrial countries could face a nasty deflation.
If growth is to pick up in Europe, interest rates need to come down quickly, whatever happens in Germany. If European central banks are worried that lower interest rates might undermine the value of their currencies abroad, Clinton could adopt a program of joint action in foreign-exchange markets. If lowering interest rates should require an understanding between the US and the EC on exchange-rate policy, who could possibly object?
The US action on the yen needs to be followed up. Japan faces no fundamental economic obstacles to lowering interest rates or increasing the budget deficit, and interest rates can safely be reduced in Europe. Clinton could help the world economy by pushing for such action sooner rather than later.