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Friday, June 19, 1998 Published at 19:01 GMT 20:01 UK

Business: The Economy

Evan Davies: What next for Japan?

This was the week that the world's authorities fought back. The US and Japan got tough - bought yen and sold dollars in order to wrench the yen back above 140 to the dollar. But what next for Japan? BBC Economics correspondent Evan Davies mulls the options.

The markets reacted with glee. At last something was being done.

The nightmare scenario could be averted: no need to await the global meltdown of sliding yen, Chinese devaluation, growing exports from Asia bankrupting western companies, a world trade war and world recession.

All because the Japanese and Americans spent a couple of billion dollars in the markets.

Radical policy promised

There was of course, good news in the deal. The Americans appear to have extracted promises from the Japanese to apply more radical measures to the festering problems of Japanese banks.

Most likely is the "year zero" option which would encompass all bad debts in a new, nationalised bank with government money and close the remaining unviable banks down, so that in effect the banking sector "starts again".

The sooner something of this kind is adopted, the better.

But otherwise, one really has to wonder whether propping up the yen is not as much part of the problem as the solution.

The expansion option

Japan needs expansion - it needs people to spend more. It is suffering from falling prices. It does not have to worry about inflation.

It is a country where any policy measure is fraught with difficulties, but where massive monetary expansion is probably the best option left. Using cash to prop up the failing sectors, push up prices and even push up the stock market is not a ridiculous option.

Printing money will also help the exporting sector. More money means a lower yen, or a price cut for exports.

It may sound irresponsible by the standards of the West - where we are trained to believe printing money is an evil inflationary monster, but for Japan, it does not seem like such a bad idea.

So why are governments and markets not jumping at the chance of a falling yen, and monetary expansion?

There are two reasons:

  • First, if the nation prints cash and the yen falls, other countries in the region will have to devalue too. In general, orthodox economics holds that competitive devaluations are a bad thing.

    But maybe in deep recession, like that being suffered in Asia, competitive devaluation at least leads to a real devaluation against western currencies and that would be a tolerable kick-start to exporters.

    Why worry about that anyway, when currencies are jumping around in such volatile fashion.

  • The second reason that orthodox forces do not want money to be printed is that falling currencies in Asia will hurt firms in Asia who borrowed US dollars.

    As their currency falls against the dollar, the burden of their dollar debt rises. Here, the problem is real. But there is a clear solution: a lot of those debts should be written off, or suspended, or turned in shareholdings which have no value until the companies concerned turn round.

    New and more tolerant bankruptcy procedures are needed in the area.

Debt problem

One would never want to argue that there are easy solutions to Asia's problems.

We in the West should not congratulate ourselves for helping prop up the yen; we should congratulate ourselves for helping export some of our growth to Asia, by letting them export some of their products to us.

And by letting them off some of the hopeless western debt they have accumulated, at least until their currencies have recovered and the value of those debts is more realistic to bear.

Finally, the point of all this is that what looks like a disaster in the region, may in fact turn out to be part of a solution.

Currency market intervention by the Japanese, the Americans, or even the fifth cavalry will not of itself achieve much more than a brief suspension of some of the symptoms of Asia's current sickness.

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