Reason For Yen Rise

Another “reason” behind the yen’s rise is the widely expected Bank of Japan (BOJ) rate hike in September or October, although possibly as early as August. This argument really doesn’t hold water. A rate hike would still leave a very large gulf between Japanese and foreign paper, although we can admit that if the famously reticent BOJ were to raise rates in the absence of inflationary pressure in the name of “normalization” and a nod to superior growth, then we need to pay attention; more hikes will be on the way. This is a tremendously contentious issue: Under what circumstances should a central bank, facing zero inflation, raise rates?

One answer is that Japan has failed to become a global financial center on par with New York or London, but has not abandoned the objective. Japan has the world’s second-largest economy but Tokyo is not the world’s second largest financial center. In fact, Tokyo has lost rank over the past 15 years. The Tokyo Stock Exchange is the world’s second-largest after the New York Stock Exchange, but its capitalization is only 10 percent of world capitalization, even as emerging markets rocket higher. It had one-third of world capitalization in 1990.

Foreigners don’t want to list their companies in Tokyo, with only 25 listing last year, from 125 the year before. New York, even with the deterrent of Sarbanes-Oxley rules, attracted more than 440 in 2006. Worse, in recent years the Tokyo Stock Exchange has had some huge technology failures that shut down trading for entire days. Despite being the land of electronics, the exchange is considered technologically deficient. Singapore and Hong Kong, with tiny economies, are bigger and more dynamic — and associated by language, history, and culture with China, which is rapidly displacing Germany as the third largest economy.

The first study group on enhancing Japan’s position as an international financial center was held in 2003, but it seems to be new FSA chief Yamamoto who is reviving the initiative. He adheres to the belief that you can’t be a major world financial center with a falling currency that fails to reflect good economic fundamentals, which in Japan’s case is the highest growth rate in the world in 2006. However, wishing to be a world financial center is not the same thing as knowing how to get there.

Is it even remotely reasonable to assume that engineering a stronger yen can be viewed as a prerequisite to this goal, and let’s worry about the rest of the components of becoming a world center later on? Yes. It is exactly the kind of straight-line thinking we have seen from Japan in the past — and oddly, it often succeeds.

Working on becoming a world financial center could remain an objective of whatever government is in office, and Prime Minister Shinzo Abe and his coalition government risk losing power in the July 29 elections. Even if Yamamoto does not remain the FSA chief, the next guy would be bound by the overarching government objective. Japan has a splendid history of longterm planning. The next FSA head will pick up the internationalization effort where Yamamoto left off.
Having a stronger currency based in part on gher interest rates is not the only obstacle Yamamoto faces in trying to make Tokyo a global financial center. He also has to overcome a penchant for regulatory red tape that stifles innovation and encourages people to find ways around regulatory agencies (including the FSA itself) instead of simply asking for exceptions and help.Most observers say the biggest problems are cultural. To be an international center, you have to attract foreigners to live and work in Tokyo.

But the language is difficult to learn and has complex nuances — the word for “risk” didn’t exist in Japanese, and comes from English. Women are second- rate citizens and not represented at executive levels, a waste of half the manpower of the country.

Japan has its fair share of smart people, but arguing and disagreeing with others is socially unacceptable. It makes brainstorming particularly difficult. And respect for older people, while laudable, restrains brash youngsters from making a splash. But splashiness and disorder are what you need to sponsor change.