by Adam S. Posen, Peterson Institute for International Economics
Op-ed in the Financial Times
July 23, 2013
© Financial Times
Shinzo Abe's clear victory in Japan's upper house election last weekend is a turning point for world trade. The Japanese prime minister has made commitments at home and abroad that, if allowed, his country would enter the Trans-Pacific Partnership (TPP) trade negotiations and make the structural reforms needed for it to be a fair and full participant.
Pledges to open up Japanese agriculture and insurance, among other sectors, bravely ran ahead of what cynics thought the Japanese electorate would support. Abe has gone way beyond the gaiatsu, the publicly reluctant utilization of outside pressure to reform, of past Japanese leaders. He is following the examples of China's Zhu Rongji and Mexico's Ernesto Zedillo; Abe has embraced international economic integration to drive significant domestic reform.
This matters, and not just for Japan itself. Its participation in the TPP strongly increases the prospects for an agreement of high-quality fit for the 21st century—one that emphasizes trade in services as much as in goods; one that has high standards for intellectual property protections as well as for the environment; and one that looks beyond old-fashioned tariffs to focus on investment flows and nontariff barriers (such as government procurement).
Most importantly, including Japan in the TPP would open up opportunities for a range of less developed economies while reassuring advanced economies on standards. This kind of quid pro quo offers some of the largest direct gains from trade. Analysis by Peter Petri and Michael Plummer, professors at Brandeis and Johns Hopkins respectively, finds that a TPP agreement including a Japan that opened up in agriculture and other sectors would result in Chile gaining about 1 percent of GDP a year by 2025, Malaysia 5 percent, and Vietnam 10 percent. Japan itself would gain 2 percent of GDP a year and the United States almost 0.5 percent via increased cross-border investment and access to rising demand for services.
Sadly, if predictably, the opposition to Japan's participation in TPP negotiations has come from interest groups within the United States, despite the major gains to be had for American companies and consumers. The “Detroit Three” car companies and the United Auto Workers union have expressed the greatest concerns. Leaving aside narrow, if partially valid, complaints about access to the domestic Japanese car market and about light truck tariffs (being addressed in a US-Japan auto side agreement anyway), they have made one big demand: that the Obama administration include some form of protection against currency undervaluation or manipulation by Japan. This has picked up some support in Congress.
Whether trade agreements in general should include unilateral currency provisions in the absence of systemic reform addressing global imbalances is a thorny issue. Since there are no robust widely acceptable definitions of currency undervaluation, any current legislation would have to be written in terms of manipulation. The irony of the stated concerns, however, is that any such practical definition of currency manipulation would not implicate Japan at present but instead could compel confrontational countermeasures against China and South Korea—and would still let off the most aggressively mercantilist major economy with the most undervalued currency: Germany.
Japan has not engaged in sustained one-sided intervention in currency markets to weaken the yen since April 1, 2004, except when the yen jumped in value in the aftermath of its tsunami and nuclear disaster of 2011 (it stopped when the G-20 complained about excess intervention). The Abe government has bound itself by the agreement of December last year for G-20 nations not to talk down their currencies or otherwise intervene unilaterally.
As a result, the yen appreciated from a low of Y102 against the dollar in mid-May to Y93 in mid-June without any direct response. Yes, Japan's vast foreign exchange reserves, second only to China's, point to a long history of currency manipulation, but that has indeed become history.
Despite some unjustified claims, quantitative easing (QE) and other forms of expansionary monetary policy are not currency manipulation. Actual manipulation involves intentional cross-border policy with effects that unambiguously shift trade, with any growth coming at others' expense. As my colleague Joseph Gagnon and I have consistently argued, QE is domestic policy with domestic goals, and has ambiguous net spillovers on other economies. For large and relatively closed economies such as Japan or the United States, trading partners probably gain in increased exports to those countries more than they lose from any decline in competitiveness caused by currency depreciation.
Some US companies' suspicions of Japanese currency manipulation are based on increasingly distant and isolated episodes. In any event, unilateral efforts to weaken the yen are successfully precluded by a well-monitored G-20 agreement. Those who wish to see application of these principles to more recent and aggressive currency manipulators than Japan in Asia and beyond require a strong stomach for putting other trade and foreign policy goals in danger. There is no justification for risking the TPP negotiations, however, and Japan's globally beneficial full participation in them, out of fear of yen manipulation—let alone of QE.
Peterson Perspective: Market Volatility in Japan: A Verdict on Abenomics? June 7, 2013
Op-ed: Japan Should Rethink Its Stimulus January 15, 2013
Policy Brief 12-12: Japan Post: Anti-Reform Law Clouds Japan's Entry to the Trans-Pacific Partnership May 2012
Op-ed: Will the Crisis Create a New Japan? March 16, 2011
Speech: Seven Broad Lessons for the United States from Japan’s Lost Decade March 26, 2009
Policy Brief 04-6: What Went Right in Japan November 2004
Working Paper 03-9: It Takes More than a Bubble to Become Japan October 2003
Book: Japan's Financial Crisis and Its Parallels to US Experience September 2000