It's unlikely the Group of Seven finance ministers and central bank governors meeting today in Washington will come to grips with the gyrations in the currency markets. More's the pity, because a show of co-operative strength by the G-7 would help reduce the volatility in the market and introduce more order to business planning.
Co-operation admittedly is difficult to achieve, given the different policy agendas of the G-7 members. But a more stable currency market is in all their long-run best interests.
The major cause of unease is the decline of the US$ against the yen and the German mark. Since the first of the year, the dollar has lost 22% against the yen and 13% against the mark. This is causing particular grief for Japanese exporters.
The strong yen makes imports to Japan cheaper and Japanese exports more expensive. The Bank of Japan says the wholesale prices of imports have dropped 29% since 1990. Wholesale prices overall, pressured by imports, have declined 8% in the same period.
The downward pressure on prices is cutting sharply into Japanese corporate profits and Japanese companies are being forced to trim costs. This year, for the first time in the past 40 years, many companies are not giving workers an annual spring pay increase. Some companies are shifting more operations to lower wage-cost countries in Asia.
Various Japanese business leaders are calling for restructuring the wage system, throwing out the traditional annual increases and gearing compensation more to individual performance and overall business conditions.
Last week, the Japanese finance minister recommended the G-7 meeting review the floating exchange rate system that has prevailed since the early 1970s and discuss ideas such as target zones for currencies and stronger currency intervention. The minister's concerns were reflected by the Bank of Japan, which warned in its latest quarterly bulletin that the yen's rise could end Japan's economic recovery.
There is little sympathy in the U.S. over the difficulties caused in Japan by the strong yen. The Americans' blame much of their huge trade deficit with Japan on Japan's restrictive market. Japan, for its part, points to lack of discipline in the U.S., which has led to large overall trade and current account deficits. Indeed, the U.S. trade deficit for the last 12 months is about US$172 billion and its current account deficit is US$158 billion. Japan, on the other hand, has a trade surplus of US$144 billion and a current account surplus of US$127 billion.
These U.S. numbers need to be turned around before the market shows more confidence in the greenback. But a more co-operative effort in support of the dollar by governments and central banks would help. As Michael Camdessus, managing director of the International Monetary Fund noted yesterday, the U.S., Japan and Germany could have acted together to stem the dollar's rapid fall by adjusting interest rates, intervening in markets and issuing clear statements in support of the dollar.
''This would have. . .served the world well,'' he said, but the opportunity was missed because of a lack of co-ordination among the G-7.
Camdessus added, ''I think the authorities can do a lot. Capital flows don't move. . .capriciously. They move because [financial markets] feel somewhere something's wrong in the macro-economic sectors in some countries.''
This is where it's important for the U.S. - and countries such as Cannada whose currency also comes under pressure - to make needed adjustments in domestic policies in response to those pressures. In particular, the U.S. needs to boost its domestic savings.
It should be noted that such changes are not made to satisfy 20-year old traders in red suspenders, as is often claimed. Investors are far more important in the market than traders and speculators. In the case of Japan, for example, the life insurance companies alone have total assets of US$1.8 trillion (that's trillion). It's not all reinvested each year, but even a portion of such a huge cache can move markets. And such investment, mostly long-term, is dictated chiefly by economic fundamentals of the host country of the investment.
Getting the economic fundamentals right should be supplemented by more official co-operation. For instance, a mechanism could be set up so that intervention in the market would be triggered if the range of trading of a key currency fell above or below prescribed levels. To give such a plan long-term credibility, there would have to be no hesitation to intervene strongly when the level was tested. Canada should take the lead in urging such a co-operative effort when the G-7 leaders meet in Halifax in June.
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Revised: June 3, 1995
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