Richard Koo: a personal view of the macroeconomy
Kan replaces Hatoyama as PM after Futenma imbroglio
It has been several weeks since my last report. During that time the eurozone turmoil sparkedby problems in Greece grew and spread to Hungary. The euro weakened further and goldresumed its rise amid a global equities correction.The US payrolls report for May, released last Friday, was also a disappointment: despite aheadline increase of 430,000 jobs, the private sector generated only slightly more than 40,000 jobs when temporary hirings of census workers are excluded.In Japan, Yukio Hatoyama resigned as prime minister after being driven into a corner on theFutenma air base issue, and the DPJ chose Naoto Kan to succeed him.
* Pragmatism informs Kan’s economic perspective
I would first like to touch on Mr. Kan’s policy skills and vision. As noted in previous reports, hisprimary interest lies in social and not economic issues. He played a particularly important role inobtaining relief for hemophiliacs who contracted AIDS via contaminated blood products.A survey of his past statements and actions reveals a careful observance of the ideals of social justice and democracy. It also leaves the impression that he is less interested in economicmatters, particularly macroeconomic matters.But at the same time, the fact that he is not tied to a single economic theory or set of economicprinciples allows him to adopt a pragmatic and flexible stance on economic matters. I suspectthis characteristic will receive more attention as the market digests the new administration’spolicies.
* Was Kan’s “tolerance” of weaker yen born out of economic pragmatism?
A prominent recent example of this pragmatism can be found in Mr. Kan’s indication soon afterbecoming Minister of Finance that he would be willing to tolerate a weaker yen. In the statementin question, made in January, he did not actually call for a weaker yen—he merely said thatmany companies were in favor of a weaker yen. The markets, however, interpreted thecomment as an attempt to guide the currency lower.The statement hardly came as a surprise, given that the yen has become perhaps the world’sstrongest currency, causing great suffering among Japan’s export-dependent manufacturers.Too, many investors in Japanese equities argue that a weaker yen is the quickest shortcut tohigher share prices in Japan. Against this backdrop, it would hardly be surprising if Mr. Kanenvisioned a scenario in which a weaker yen pushed stock prices higher, thereby contributing toa Japanese economic recovery.
* Aso and Fujii saved global economy from competitive currency devaluations
In contrast, Yasuhisa Fujii—Mr. Kan’s predecessor at the Ministry of Finance—and formerPrime Minister Taro Aso had a deep understanding of both the real economy and economichistory. They were well aware that when the global economy faced a similar crisis in the 1930sand countries tried to export their way out of their problems, the result was a round ofcompetitive currency devaluations that led to protectionist measures and, ultimately, a globaleconomic collapse.Mr. Aso and Mr. Fujii feared that if Japan—a trade surplus nation—were to guide its currencylower, it would provoke a round of competitive devaluations by the US and other trade deficitnations. Consequently, they never suggested that a weaker yen would be preferable or eventolerated, which was understandably quite unpopular within Japan.
Nomura Securities Co Ltd, Tokyo
Economic Research – Flash Report
8 June 2010
(issued in Japanese on 7 June 2010)
Chief economistNomura Research Institute, TokyoNomura research sites:www.nomura.com/researchBloomberg: NMR
Please read the importantdisclosures and disclaimerson pages 8–9.