A yen to try the balancing act

Second, Japan has received some unexpected shocks in the past two years. The March 11, 2011, earthquake, which triggered a tsunami and nuclear leak from the Fukushima Daiichi nuclear power plant, dealt a devastating blow to the Japanese economy. Later, the intensification of the Diaoyu Island disputes, because of the Japanese government's actions, undermined Sino-Japanese trade and worsened Japan's woes, prompting it to change its economic strategy.

Third, Japan faces an economic crisis because of long-term recession. International factors have indeed played a role in the recession, but Japan has been on the "economic downslide" for years. For example, Japan's nominal GDP increased less than 3 percent from 1991 to 2012, which means it has been caught in a deflationary cycle for more than 20 years. Moreover, to stimulate the economy, Japan has exhausted its financial resources with its debt rate rising to more than 200 percent. So if Japan does not improve its relations, especially trade relations, with China, it could slide into deeper recession.

According to Japanese government data, the country's debt ratio crossed the 100 percent mark in the 1990s, peaking at 235 percent in 2012. Japan is not yet in a debt crisis because it requires little fund from the market despite its long-term depression and it is a large exporter of capital with the largest creditor's rights in foreign markets. And since a major part of Japan's loans to the US is in exchange for government bonds, enterprise bonds and private debts, it will deal a big blow to the US if it withdraws them to save its economy, and this is something Washington will not allow to happen.

Given these factors, the yen's depreciation is within reasonable limits and according to Japan's needs. Also, with better communication between Tokyo and Washington, the US believes that this is a good time for the yen's depreciation, especially because the US economy is on the road to true recovery.

The negative impact of a depreciating yen for China will be limited because of the current international division of labor between the two countries. Japan has made China, instead of the US, its most important market since 2000. In fact, China has become a production base for Japan, and Japanese brand products are made in China and then exported to the US and Europe.

The intermediate products made in China account for 90 percent of Japan's total exports to China and 40 percent of its total exports to the world. The Chinese mainland provides the low-end goods and the four Asian tigers including Taiwan and Hong Kong, the middle-end products, with Japan specializing in high-end, value-added products.

More importantly, Japan is likely to increase its exports to China by applying a "localized strategy" to sell made-in-China products on the mainland, which will not necessarily be routed through customs but treated more like local goods sold in local markets. China has already accepted this strategy. So the depreciation of the yen will not have a major impact on China's exports or imports, and will not trigger a currency war.

The author is a researcher at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce.

(China Daily 04/15/2013 page9)