The Price of Japan's Loyalty for the United States
Hideo TAMURA (Senior Staff Writer, The Nihon Keizai Shimbun)
(This article is an adapted version prepared by the author based on his recent submission to NBR's Japan-U.S. Internet Discussion Forum.)
The loyalty and currency intervention
Japanese holding of US Treasury bonds is huge. Although Japan has freedom to diversify its foreign reserve asset to others such as Euro, Swiss franc, or even gold, the government of Japan takes dollar mainly. MOF has no choice but US securities. It is beneficial, of course, for Japanese economy as well as for American economy to sustain low interest rates and stabilize NY markets because of the critical importance of American economy in the global market. It means Japan could enjoy dividend while she maintain the payment of the cost of loyalty to WASHINGTON, DC. I think official Japan could still afford to buy up more US securities because we have no fear of bubble concerning asset prices and amazingly low growth of money supply with zero interest rate, while private institutions are cautious to invest risky dollar. MOF and Koizumi will apparently keep current policy based on political judgment to support the Bush administration eventually. Now the question is whether the cost will be paid off or not. What is the real cost if not be paid off?
My talking point focuses on the ongoing damage of financial markets of Japan originated by issuing too excessive TB, or short-term government bill issued by MOF, for intervening into foreign exchange market to buy up dollar. The cumulated TB combined with Mt. Everest-like long term JGB (Japanese Government Bond) will raise interest rates and let the bond prices drop sharply sooner or later when Japan economy starts to show strong recovery...that is a matter of crisis management mainly conducted by BOJ associated with MOF. That is what I call as the cost of Loyalty for Japan what the Bush administration and most of American pundits, I'm afraid, would never admit it as "loyalty".
At the most, some Japanese experts such as Dr. Ed Lincoln saying that Japanese intervention policy stems from a desire to keep the current recovery going by helping exports grow.
Economic reality shows Japan has still count on external resources although it must be justified under the big tidal wave of globalization. Without any positive results from both government spending and zero-interest by BOJ, Japan Corporation has to exploit spillover effect from the fast growing China exporting to American "six-pack" market. The Bush administration desperately needs even further weaker dollar to improve the unemployment and profits of multi-national corporation while a sharp drop of dollar indefinitely must be avoided for the rest of the world as well as for the US. Japan's role must be significant in this context; that is massive intervention and purchase of US bonds.
The lessons from late 1980's
The expansion of the foreign exchange account to 140 trillion yen at coming fiscal year from 79 trillion yen is designed to work for two or three years. The authentic economic recovery is expected to start within coming 2 or 3 years, according to some MOF officials. If this scenario becomes true, another trouble may occur; that is interest rate hike which will surely let the bond prices drop sharply. So, whether we wish or not, we have to pay the price of loyalty to America later. At the Japan-US Discussion Forum, Mr. Alexander Kinmont notes "currency intervention on the current scale is an implicit acknowledgement that the Government of Japan has no interest in allowing or plan to provoke an economic recovery".
Although I know some pundits may not agree with my definition of "the price of loyalty", Japan has shown abundant loyalty to America in terms of the holding of US government securities as well as supporting policy of the buck. Of course, it is the primary choice by Japan as an independent nation to conduct the monetary-currency policy. But I know how Japan, both BOJ and MOF, took seriously the suggestion by the top-officials of the Treasury Dep. and FRB just after the Black Monday in 1987 and maintained monetary expansion even after conspicuous fever of asset prices. BOJ officials informally regret the delay of their policy change to restriction. Though I'm not sure if Japan's primary concern late 1980's came from Washington, DC, I know how the top officials and politicians were worried about the possible blame of Japan as the major cause of world-scale crash of financial market if Japan stopped monetary expansion or committed inaction while it expanded trade surplus.
Regarding current intervention policy, the fundamental attitude to US dollar by Japan resembles the one just after the crash in 1987. So, I have questioned if Japan learned lesson from the bubble or not, and if Japan recognize precisely the price of loyalty to America.
The fatal "loyalty" for America and its political implication
My point of the loyalty to America is so deeply rooted into the structure of Japan after the WW2. It must be the Japan's unquestionable role to take any action to support the US whatever it is, either currency market issue or purchase of US bonds, or Iraq by SDF while we need desperately protection by America because we have no ability to defend ourselves even if we could be equipped by nuclear weapon...the nuclear reality of Japan is very simple and nuclear-weapon- Japan nightmare story makes no sense as along as we have no reliable technology to be utilized by carrier such as jet plane or rockets, as I tried to prove as followings.
With regard to questions of dollar-yen, US bonds, SDF to Iraq, the threat of N. Korea and the U.S.-Japan alliance overall, the loyalty for the US by Japan is still thought to be the only answer. Some people in Japan may say, "Yes, we can be independent if we revise the article 9 of the constitution and enjoy the freedom of choice in the economic policy including yen-dollar intervention as well international politics". I have to say that kind of story is based on a mere illusion.
The real problem of Japan has been generated by its disintegrated nature as a state.
For instance, Japanese government has been spending as much as 500 billion yen budget for F-2 fighter jet project since early 1990's, or FSX which appears to be just useless technically because its main wing has structural weakness when it flies at the designated speed. Although this fatal error has been identified by many experts, including American defense engineers of course, SDF has demonstrated F-2 PROJECT is a success.
Actually it cannot fly but low speed, cannot fight against N. Korean a low tech MIG. The cost of each F-2 is as four times as F16 of US Air Force which has been taken as the model of F-2. F-2 must be the art of Japanese peace because of its useless but peaceful nature as a war machine.
Furthermore, so called "ACTIVE PHASED ARRAY RADAR" is equipped into the body of F-2.
This is also a new challenge for Japanese defense industry or Mitsubishi group. This radar misunderstands a friend fighter as an enemy, according to some SDF officials. FSX project was raised by revisionists as a big challenge or a threat to America by high tech giant Japan early 1990's. Unfortunately, this kind of overestimation has spoiled Japanese elite such as government officials, top engineers and hawk politicians. And amazingly very few criticisms have occurred within the Administration, Congress and mass media.
I don't intend to blame them. Instead, I acknowledge this fact as the shortage of a tense atmosphere stemming partly from the sense of protectorate by the US. Heavy and high tech industries can maintain their capacity of factories, top engineers and lifetime employment system providing the government with luxurious paper tiger, while SDF and some bureaucrats enjoy "amakudari", or job opportunities after retirement presented by the companies.
And nobody cares about the lack of defense capability because non-necessity of real fighting over the Japanese territory thank to the Japan-US Security Treaty as well as the article 9 which prohibits military action as far as translated honestly.
The similar troubles have occurred here and there...consequential failures of launching of H2 rockets, spy satellite what demonstrate the lack of integrated system as a nation--although Japanese companies can behave very well as a single unit of high tech producer, they can not perform well or even are corrupted when they are involved in well highly diversified world which must be integrated by a national strategy. Government elites, who have to take the leadership to monitor and supervise the sophisticated technology, have thrown their role to the contractors. The contractors cannot deal with sub-contractors effectively as seamless simple mistakes of H-2 show when no leadership is required. This vicious cycle may have stemmed from the lack of true leadership mind at the state level and no integration of diversified sectors pertaining to national strategy.
The national sense of peace, which has been fermented since the end of WW2 and the security treaty, has been comfortably supported by the public so far. The acknowledgement of inability of integration for self-defense has been either consciously or unconsciously shared by the majority of Japanese leaders belong to each society in the islands, I think. That is why Japan is loyal enough to the US to dispatch SDF to Iraq while even Koizumi insists SDF's role is not fighting in Iraq, not well equipped to defense themselves, but the co-operation for the restoration. If SDF demonstrate, however, that they can fight very well as an army, it will surely embarrass the public of Japan, and political elites. SDF must be a peace corps and absolutely not army by any means to keep status quo overall.