Currency intervention waste of Japanese resources
2004-03-16 18:07
Last year, the Japanese government spent 20 trillion yen worth of
taxpayers' money on buying U.S. Treasury bonds. This was the biggest annual
amount of official purchases of foreign currency assets by any country in
history. Since then, the Japanese appetite for U.S. government debt has
really increased--this January alone, the government bought more than 7
trillion yen (about 68 billion dollars) worth of U.S. dollar assets, almost
half of which was spent on Treasuries, breaking all records for such
purchases during any one month.
As a result of these investments, the Japanese government has become
the single most important buyer of newly issued U.S. government debt.
Some would argue that buying U.S. Treasuries may be a justifiable
investment. Unlike stock investors, buyers of government bonds who hold on
to the paper until maturity should not lose any money--assuming the
government does not default. It is certainly true that among the many assets
available, U.S. Treasuries are a viable option for any investor, including
governments. But this argument assumes that the Japanese government had the
money in the first place. While the Singapore government or the government
of the Principality of Liechtenstein may have no national debt, the same
does not hold true for Japan.
Admittedly, Japan is a rich country and its gross domestic product is
second only to that of the United States. But the Japanese national debt is
not far behind the U.S. debt and the Japanese debt-income ratio is higher
than that of the United States.
But does the Japanese government not own a lot of assets--the largest
foreign exchange reserves in the world, to be precise? True. But these are
almost entirely held in the said U.S. Treasuries. Thus it does not make
sense to use these foreign exchange reserves to purchase U.S. Treasuries: If
that was desired, no new purchases would be necessary, and the government
would be happy with the vast stockpile already in its possession. Apparently
it is not.
But if the Japanese government cannot use its foreign exchange
reserves to buy U.S. Treasuries, how else can it pay for them? After all,
for the better part of the past decade tax revenues have been far smaller
than government expenditures. The ensuing fiscal deficits have increased
national debt to record amounts.
The answer is that the Japanese government has been borrowing money in
order to lend it to the U.S. government. Let's get this clear: Japan's
government issues debt, such as government bonds, so that it can purchase
the government bonds issued by the United States. This raises a few
questions. For instance: Does the Japanese government really need to buy
more U.S. Treasuries, despite already owning the world's single biggest pile
of them? Does it really make sense to borrow money, just to lend the money
to another country that needs to borrow?
Here is how the experts have explained events to us in the media: The
Japanese government is borrowing money to buy the debts of the U.S.
government, because this will weaken the Japanese currency, and that is a
good thing for Japan's economy. That's apparently why the International
Monetary Fund's Managing Director Horst Koehler, since then elevated to
president-elect of Germany, has praised Japan for its actions.
We can quickly test whether this story is true by simply verifying
whether such official purchases of U.S. Treasuries have indeed weakened the
yen.
There is no such evidence. In 1994, Japan conducted official foreign
exchange intervention of more than 30 billion dollars. The yen strengthened
to a record high of 79.75 yen per dollar by April 1995. In 1999, Japan set a
new world record in official currency intervention, spending more than 50
billion dollars on weakening the yen. The yen responded by strengthening
almost 20 percent by the end of that year. The government has remained the
sole competitor in the increasingly frantic bid to break its previous
records in currency intervention. Despite the foreign exchange intervention
of about 200 billion dollars in 2003 and the first few weeks of this year,
the yen rose from about 120 yen per dollar to 105 yen.
There is no empirical evidence that the Japanese government is buying
U.S Treasuries to weaken the yen--quite the opposite. Also, it is not clear
that a weaker yen would actually stimulate the economy, as it makes the
badly needed imports of raw materials and intermediary inputs more
expensive. Remember, Japan even runs a trade surplus with China.
Instead of holding a world record of 777 billion dollars in foreign
exchange assets, mostly in the form of U.S. government debt, the Japanese
government could sell them and use the proceeds to pay back some of its own
record-breaking debt mountain, or stop issuing new debt--Japanese foreign
exchange reserves currently amount to about 86 trillion yen, which should
pay for the annual budget deficit.
Yet, the policy of buying U.S. Treasuries must have some
beneficiaries, otherwise it would probably not have been adopted.
It certainly has helped the U.S. government. The Japanese purchases of
U.S. Treasuries in 2003 were almost enough to fund half of the U.S.
government's annual fiscal deficit. Thanks to loyal Japanese support, the
U.S. administration has been able to handle its rapidly expanding fiscal
deficit with ease, ballooning military and paramilitary costs of running its
empire notwithstanding.
What is harder to understand is why Japan, which has the highest
debt-GDP ratio among industrialized countries, should go further into debt,
just so that the already profligate U.S. government can fund its growing
indebtedness. In effect, Japanese taxpayers, already suffering from over a
decade of recession, a collapsing pension system and record national debt,
are being asked to also shoulder the debts of the U.S. government. It may be
convenient for the U.S. military-industrial complex to obtain such generous
funding from Japan.
But is it in the Japanese interest? I think taxpayers have a right to
demand that their money is spent more wisely and in their best interest.
????????: Richard Werner, Yomiuri Shimbun, 2004-03-16
