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No. 42 — November 5, 1999

 

Feature Article

THE YEN AND EXCHANGE RATE VOLATILITY:
IMPLICATIONS FOR EXPORT COMPETITIVENESS
IN JAPAN AND EAST ASIA

Marc Castellano

Summary

Several East Asian countries have adopted, in a broad sense, Japan's development model, which is based on a strong manufacturing sector specializing in export goods. Whether this strategy directly contributed to the so-called "miracle growth" is somewhat controversial, but the fact remains that much of East Asia continues to look toward exports for economic growth. The East Asian financial crisis, sparked by the July 1997 devaluation of the Thai baht, upset regional currency values and threatened to undermine the balance of export competitiveness. The yen initially sustained little damage, but as it steadily depreciated over the following months, key competitors began to worry. However, after a period of weakness, the yen reversed course in mid-1998. It has appreciated rapidly since June 1999, causing domestic anxiety reminiscent of reactions seen in neighboring countries that had dealt with a weak yen a year earlier.

Concerns in South Korea, a country that produces many of the same export goods as Japan, reached a fever pitch in mid-1998. Seoul feared that with pricing advantages shifting to some of its closest competitors, export markets would begin to dry up. Mixed results for industries in 1998 still painted a fairly clear picture: overall, exports suffered a setback. The People's Republic of China joined South Korea in worrying aloud about the weak yen. However, China focused on its economic relationship with Japan rather than on its trade position relative to other countries. Its fears proved appropriate. In 1998, Japanese direct investment in China fell sharply while Chinese exports to Japan also declined.

When Japan's turn came to fret about unfavorable exchange rates, the government's voice was one of the first to be heard. Tokyo was concerned that the profits of exporters, champions of the struggling domestic economy, would be eaten up by an excessively strong yen. It is too early to render a judgment, but corporate earnings reports and trade figures so far are not encouraging.

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Weekly Review

OBUCHI VOWS SUSTAINABLE GROWTH, AVOIDS SPECIFICS ON STICKY ISSUES
--- by Barbara Wanner

Prime Minister Keizo Obuchi convened the fall special Diet session October 29 with a speech that reaffirmed in general terms his commitment to economic recovery through continued fiscal stimulus. In an effort to contain the political damage caused by controversial remarks on nuclear armament and rape made by subsequently sacked Japan Defense Agency Parliamentary Vice Minister Shingo Nishimura (see JEI Report No. 41B, October 29, 1999), Mr. Obuchi apologized to the nation for the official's insensitive comments. He also assumed the responsibility for the unwise appointment of an avowed hawk to such a sensitive and highly visible position.

 

JAPAN'S TRADE SURPLUS FELL AGAIN OVER SUMMER
--- by Douglas Ostrom

Little by little, evidence is accumulating that Japan's economic recovery is real. Often overlooked but remarkably consistent confirmation comes from the customs-clearance trade statistics. Since the start of the year, imports have shown strength in each quarter, suggesting a rebound in domestic demand (see JEI Report No. 30B, August 6, 1999). This trend continued over the summer, contributing to a 10.9 percent contraction in Japan's huge trade surplus, the second straight quarterly drop (see Table 1).

 

JAPAN BIDS UP VENTURE CAPITAL INDUSTRY
--- by Jon Choy

Japanese financial institutions and the government are focusing more attention and resources than ever before on the nation's venture capitalists and start-ups, hoping to duplicate the American venture capital industry's contribution to the U.S. economy. Tokyo has initiated — or plans to launch — a raft of programs designed to help entrepreneurs open shop and expand business. Financial institutions are complementing the government's initiatives by offering services tailored to the unusual needs and circumstances of venture enterprises. At the same time, attitudes in Japan are shifting regarding which career paths are desirable and prestigious.

 

JAPAN, SOUTH KOREA WORK TOWARD STRENGTHENED BILATERAL RELATIONS
--- by Marc Castellano

Sixteen cabinet ministers from Japan and South Korea led by Prime Minister Keizo Obuchi and his counterpart, Kim Jong-pil, met on the South Korean resort island of Cheju October 23 and October 24 to discuss a range of bilateral security, political and economic issues left pending after an October 1998 summit between Mr. Obuchi and President Kim Dae Jung (see JEI Report No. 39B, October 16, 1998). Topping the agenda were concerns about North Korea, which recently rattled its neighbors by threatening to test-fire a long-range ballistic missile.

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