A noble view but much too centred on Japan

PUBLISHED : Tuesday, 17 November, 1998, 12:00am
UPDATED : Tuesday, 17 November, 1998, 12:00am

Noble Laureate Merton Miller, who has some worthwhile things to say but who also has an unusually big mouth in telling Asian people how to run their affairs, has made the classic Japan error again.

Speaking to the Legco Financial Affairs Panel at the weekend he blamed Japan for sending much of Asia into an economic tailspin and attributed many of the problems to interest rate cuts in Japan.

As the yen depreciated against the US dollar, Japanese exports became more competitive against those from other Asian countries, many of which had their currencies loosely linked to the US dollar, he said.

First, a word about how international trade is denominated. There would be a fine mess if Hong Kong exports to Italy were billed in HK dollars and paid in Italian lira but there is a simple way out of this. Denominate everything in one standard currency and sort out your local currency translations at home.

That standard currency is the US dollar. Thus, when you are looking at trade growth, express it in US dollar terms. This is how it's effectively billed, this is the way industrialists look at it and this is the way many Asian countries report the figures. Sometimes you don't even get them in local currency terms.

Now turn to Exhibit A in the chart, the year-on-year growth rate of exports in US dollar terms on a six month moving average basis for Japan and for the rest of Asia.

Can you see any difference in the trend? They both go up and down at almost exactly the same time. In fact the only difference is that Asia outside of Japan has consistently shown a better export performance than Japan, which argues that Japan's competitive edge has consistently diminished in recent years.

It all confounds the simple theory which holds that currency movements are the determining factor in trade performance. This theory says that if your currency is strong your domestic costs go up against the US dollar and you lose competitiveness. If your currency is weak your costs go down and you become more competitive.

Yet the yen was at its strongest in early 1995 just when Japan's export growth was at its highest and the movements of the yen bear precious little resemblance to the trend of Japanese export growth over the period of the chart.

The same holds true for the rest of Asia. Its currencies were generally locked tight to the US dollar until mid-1997 and were then hugely devalued. The theory says this should have produced an export boom. Instead there was an export collapse.

Throw the theory out the window. It has clearly failed the acid test in the real world. These trends in trade are actually the result of changes in such things as domestic financial health, international market demand relative to production capacity and prices of commodities and traded goods.

They are things which work exactly the same way for Japan and the rest of Asia. You don't need detailed proof of it. Just look at the chart and you know it has to be true.

Spend a little more time here on your next visit, Mr Miller. The New York view of Asia is much too Japan centred.