'A strong yen isn't necessarily a bad thing'

Updated : 07.07.2016 / Category Economy

The following is an interview with Professor Mitsuru Iwamura of Waseda Business School.

Sentaku: As the yen continues to strengthen, the government and mass media are saying things like "the rising yen causes problems." But is this really the case?

20160707084006-811af4c0687dac1fcfcd328fa20b24c1ea8f89dc.jpgIwamura: Absolutely not. The stronger the yen gets, the more benefits there are for the public. When the yen is weak, export industries benefit; when it's strong, import industries benefit. As for exports, many of the big industrial firms, such as carmaker Toyota, experience robust sales, while [Chinese and other foreign tourists] go "binge shopping" when the yen is weak, so policymakers get behind it, and the media reports favorably on it, too. On the other hand, when the yen is strong, the price of gasoline and electricity falls and it's much easier for people to get by financially. Prime Minister Shinzo Abe has said all along that it's better to have a weak yen, but the problem really isn't quite as straightforward as that. The prime minister's understanding of economic affairs is somewhat insufficient.

Sentaku: Falling stock prices are perceived as a problem too.

Iwamura: It's true that stock prices rise if economic conditions improve, but it's difficult to back arguments claiming that affluence abounds when stock prices go up. During Japan's period of rapid growth, corporate stocks remained relatively cheap. But in the case of Japan's modern-day stock market, it's foreigners—who hold about 50 percent of the shareholdings—that are doing about 70 percent to 80 percent of the buying and selling. The reality is that climbing stock prices and dividends cause cash to flow overseas. Company stockholders becoming wealthy, and the people who actually work at the company becoming better off are two different issues.

Sentaku: Is it impossible for economic conditions to improve by triggering inflation through monetary easing?

Iwamura: The "reflation theorists" believe that prices rise if large amounts of currency are supplied, but I wonder how they'd explain the fall in the value of oil. It's not only true for Japan—in Europe and the United States, too, prices fall for typical international commodities during periods of monetary easing. The Bank of Japan (BOJ) functions like a scale within the economy, but manipulating the scale won't produce wealth—no matter how shrewdly it's manipulated.

Monetary policy is not supposed to produce benefits or harm in the long-term. The economy seemed to take an immediate turn for the better after Haruhiko Kuroda assumed the post of governor at the Bank of Japan in 2013. But as time passes, this effect will naturally erode and disappear. The effect from the second round of monetary easing has faded, and this year's third round has become a laughing stock, because the market has wised-up.

In 1973, then Prime Minister Kakuei Tanaka withdrew his theory for economic growth based on his plan for revamping the Japanese archipelago [through infrastructure building and industrial redistribution], but he backpedaled on this idea after his campaign caused inflation, with personal expenditure cooling as a result. It takes a lot of dignity and courage for a politician to admit to a policy error.

Sentaku: It has been pointed out that Japanese companies have lost their international competitiveness.

Iwamura: It's often said that the weak point of Japanese firms is the "Galapagos syndrome" [products designed specifically for the domestic market that, as a result, do not sell overseas], but I'm not sure whether this is necessarily a bad thing. If the Galapagos syndrome allow us to live comfortably, then there's really no need to go all out in the pursuit of globalization. If manufacturing industries expand overseas, the citizens of that country would reap the benefits, but there would be no corresponding advantages for the Japanese public.

Unlike in the past, modern-day Japan no longer has the power to protect companies that expand their operations overseas beyond their abilities, or Japanese overseas assets when their security is threatened. At a time when both the population and business activities are reduced compared to the past, it's downright dangerous to attempt to continue protecting employment in, and a share of, the global market.

Sentaku: Is there any reason for the recent spate of unusual events in developed countries, such as the withdrawal of the United Kingdom from the European Union, or the Donald Trump phenomenon in the United Sates?

Iwamura: In Japan, Europe and the United States, there's a widening disparity between the haves and the have-nots, with large incomes earned by only a handful of rich individuals. People are blaming their dissatisfaction and fears on the workings of society. Those who espouse such views are growing in strength, giving rise to spectres such as Trump on the right and Saunders on the left. There's a similar foundation in Japan. If the elite class advocates an unrealizable dream and causes frustration and disappointment among the populace, then we may well see the rise of a Japanese-style Trump figure.

(Interview by Mikio Ikuma)

Mitsuru Iwamura was born in Tokyo in 1950. After graduating from the University of Tokyo's Faculty of Economics in 1974, he took up a position with the Bank of Japan and subsequently worked in New York. His various posts have included a role as a counsellor in the BOJ's Monetary Affairs Department. Iwamura has been a professor in finance at Waseda Business School since 1998 and he has penned several books, including "Kahei No Keizaigaku" (The Economics of Currency), and "Chuo Ginko Ga Owaru Hi" (Last Day of the Central Bank).


This is a translation of an article from the July 2016 issue of Sentaku. The original article can be found here.