London's young dealers mix oranges and lemons

PUBLISHED : Wednesday, 12 August, 1998, 12:00am
UPDATED : Wednesday, 12 August, 1998, 12:00am

Anything can be true for a short while if the 29-year-olds who inhabit London dealing rooms believe it.

It was the noted economist Paul Krugman who said this recently and he could have added the 29-year-olds in the dealing rooms of New York, Tokyo and Hong Kong.

It is perfectly reasonable that dealers should take the view that the yen deserves to be weaker. Japan's new prime minister and his team have done little to introduce the financial reform measures their country desperately needs, and this was bound to result in some people washing their hands of the yen when they earlier showed willingness to support it.

But what makes Mr Krugman's observation particularly apt at the moment is the implications of a weak yen that the 29-year-old dealers (and many of them are nowhere near that old) see for the rest of Asia.

Received wisdom has it that if the yen breaches some critical and approaching barrier, say 160 to the US dollar, then the mainland will have as much problem in preventing the yuan from collapsing as it has at the moment with stopping breaches of the dykes on the Yangtze.

And if the yuan goes then the HK dollar peg to the US dollar is history; while other already-weakened currencies in the rest of Asia will tumble as a renewed financial crisis besets the region.

If they believe it then it can be true for a period, and the performance of Asian markets over the past few days seems to indicate the period is upon us.

But why should it happen? Asia is not a single economic entity with Japan at its financial centre, as the US is the financial and trade centre of North America. The rest of Asia, for instance, ships little more than 10 per cent of its exports to Japan. The equivalent figure for Canadian or Mexican exports to the US is more like 70 per cent.

And the yen is not the fallback currency of the rest of Asia. This role is filled by the US dollar.

Japanese direct investment in Asia has declined in relative importance since the Japanese economy began to stumble in 1991; the latest figures, although admittedly imprecise, indicate it amounts to no more than 1 per cent of combined Asian gross domestic product.

Japanese banks' lending to Asia has been larger, perhaps as high as US$250 billion, although official sources differ. But most of this has been US dollar lending as Japan recycles its US dollar trade surpluses.

There is little indication that the money is being pulled out again. Japanese banks may want to pull it out, but they cannot. The borrowers are in no state to repay.

In fact, the figures show money leaving Japan, not coming back in, and doing so at a faster pace than for many years. Net foreign assets of the Japanese banking system are higher than ever before.

It is simply a false analogy to compare the mainland's or Hong Kong's financial relations with Japan to Mexico's or Canada's with the US. It is not true that a weak yen will quickly make Japanese industry competitive with the rest of Asia and so forestall an industrial recovery in the region. Those days are past.

In the first place, international trade these days is denominated in US dollars, and, while yen wages may be lower in US dollar terms, Japan's import bill for raw materials and components has risen in yen terms. The trade advantages of a weaker currency all wash out quickly, particularly for a country that has, over the years, succeeded in reducing the wage component of its export costs.

Meanwhile, Japan has lost its leading position in some industries that years earlier it might have expected to dominate.

For computers these days, go to Taiwan; for shipbuilding, go to South Korea; for air conditioners go to Malaysia. This won't change overnight.

Japan is a partner in Asian economic development, not the master of it. The rest of Asia may feel a pinch if a partner falters but not the debilitating injury that Mexico would suffer if the US economy collapsed.

Truth is temporary for the 29-year-olds.