Re: Policy Innovations - The Carnegie Council's online magazine for a fairer globalization.

elincoln — Tue, 14 Apr 2009 11:28:09 -0000

Yukie--

Interesting. Sakakibara never fails to say something provocative (I've
known him for almost 30 years, and have always found him interesting, if
not entirely believable). It's interesting that he put the argument in
favor of a stronger yen in terms of a mechanism to lower the
yen-denominated price of imported commodities (written last year when
commodity prices were temporarily rising). Over the next half century,
if he is correct that commodity prices will be rising (a statement that
is somewhat uncertain, except perhaps for crude oil), then a stronger
yen does change the terms of trade (i.e. the physical amount of exports
needed to pay for imports). But in such a world, it's also critical
that Japan be able to export to pay for the imports, and if the foreign
price elasticity of demand for Japan's products is high, then the terms
of trade gain would be offset by a drop in demand for Japanese products
(made more expensive abroad by the stronger yen). Given the highly
competitive global market for Japan's key exports (such as automobiles
and consumer electronics) this is likely to be the case. So a stronger
yen does not necessarily do all that much to help deal with higher
commodity prices.

I certainly agree that a Japan that a) absorbed more imports, b) relied
more heavily on domestic demand for generating economic growth, would be
a better configuration. The problem, at least for the next several
years, is how to get there. The exchange rate is not something that the
government can push up through policy measures. Mikuni and Murphy would
argue that the government could change a number of structural and
regulatory features of the economy, but some of that has actually been
occurring over the past decade (and I think they somewhat overdid that
argument in their book). The only other policy tool would be to
increase interest rates, but with the economy facing recession and
deflation, I doubt that the government could reasonably do that for
several more years. Meanwhile, firms are in no position to increase
employment and wages--which is what Japan really needs to drive domestic
demand.

Yes, sometimes the bus can take a long time (not that this has much to
do with the more serious discussion of high-speed trains for the U.S.,
but this is fun stuff, so here goes. . .). But when I take Vamoose, it
usually makes the trip NY/Bethesda in under 4 hours (usually about 3
hours and 45 minutes). That's partly because, unlike the Chinatown bus,
it doesn't have to drive into Washington (from I-95/I-495 interchange it
takes about 10-15 minutes to get to the Bethesda stop). So for me
(living on the weekends in Maryland just beyond Bethesda and commuting
to NY) the time is just about competitive with Amtrak (the Amtrak part
is faster, but then it takes 20-25 minutes on Metro for the Union
Station-Bethesda trip). Still, my wife got stuck last summer on a
Friday night when there was an accident on I-95, so the bus took over 6
hours to get to NY. By the way, the Jewish buses seem to have safer
drivers than the Chinatown buses (and the NY stop at Penn Station is
much more convenient than being dropped off in Chinatown several blocks
from the nearest subway station). But the interesting part of this
story is the business models involved--at $20-25 each way, the buses are
grabbing a lot of traffic from Amtrak as demand appears to be very price
elastic (with lots of people willing to spend a little be longer on the
trip for a much lower price). And at the other end of the spectrum, I
just can't understand how Amtrak gets away with charging so much more
for Acela, when the trip is only about 15-20 minutes shorter than the
regular trains (my guess: expense accounts; if some else is paying for
my ticket I always take Acela but when I pay, I never take it). To
bring this back to the high-speed train question, the shorter time would
be great, but if Amtrak charges a high price (to recoup investment
cost), demand might not be very strong. Kokutetsu solved that dilemma
back in 1964 by making it virtually impossible to travel on ordinary
trains all the way from Tokyo to Osaka.

I guess I should have stuck this on the Carnegie website as a comment;
I'll do that but strip out the final paragraph as it's more personal
chit chat about buses than serious discussion of bilateral relations.

Ed Lincoln

Re: Policy Innovations - The Carnegie Council's online magazine for a fairer globalization.

elincoln — Mon, 13 Apr 2009 16:57:31 -0000

Devin--

I read this piece with great interest. Most of it I agreed with 100% (since the security stuff is thoroughly aligned with my view of Japan). On the economic side here are a few thoughts--

1. I was sorry to see the stuff about the dollar-yen exchange rate as a policy variable. The Japanese government appears to have gradually weaned itself from the crutch of intervention to keep the yen low (they have not intervened since the spring of 2004). At this point about all anyone could say is that extremely low interest rates in Japan tended to keep the yen weaker internationally than it otherwise would be (but with the drop in US interest rates, even that argument has faded, and the yen has risen), though low interest rates were not pursued for the sake of a weak yen but as a result of deflation and weak domestic economic performance. Note: this is the first I've heard that Sakakibara may be in favor of a stronger yen. He would, by the way, make a terrible finance minister--that suggestion sent shudders down my back. He is too opinionated and too unwilling to compromise to do well in a key, sensitive cabinet post. Anyway, rather than talking about some sort of a bilateral or regional deal in which the yen rises in value, it would be better to say: fundamental macroeconomic trends in the forseeable future suggest that the yen will remain somewhat weak (relative to what Americans might like it to be), and that we need to accept a Japan with a sizable current-account surplus (2-4 percent of GDP) once the world gets beyond the current recession (which is temporarily reducing Japan's surplus); further progress on opening the Japanese market (FTA???) would help cement American willingness to accept this macroecnomic outcome.

2. Overall, I would be inclined to treat the economic situation in this memo the same way you treat the security situation: a shift toward reliance on a vigorous growth of domestic demand to drive the economy just ain't gonna happen anytime soon. The weakness in household income and spending that was characteristic of the economic recovery 2002-2007 is likely to persist. Households will lose income in the current recession, and firms will hold down hiring and wages for some time after recovery finally starts. As in 2002, the upturn in the economy will come from exports, which means that Japan is likely to lag behind both China and the U.S. in the timing of its recovery. The lesson is that we should not expect too much from Japan in the effort to restart the global growth engine (even though Aso is promising a large stimulus package).

3. The Shinkansen stuff is just silly (and I was sorry that Aso apparently dwelled on it during his Washington visit). First: the shift to high-speed rail is not going to happen in the U.S. (just think about the paltry sum allocated to it in Obama's stimulus package). We've been talking about this in the U.S. for 45 years (and the Japanese National Railways actually had a project with Amtrak in the late 1970s, providing technical advice on the Northeast Corridor). The first step, by the way, was the "Metroliner," which debuted around 1968 or 1969 (prior to Amtrak) and was touted an attempt at high-speed rail, cutting the NY-Washington time to just under 3 hours. In broad terms, we do not have the population density to justify high-speed rail investment (since, as you note, to do it right one would have to invest heavily in new infrastructure. In narrow pol/econ terms: I still don't see any real interest in spending the money to improve even the Northeast Corridor, one of the few areas where there might be benefits from improved service. Second: if we do go ahead, even in a modest manner, the Japanese are no longer alone in having technology/equipment to peddle to us. It would be a travesty if Japan were to get contracts out of concern for the bilateral relationship, rather than letting Japanese and European firms duke it out for the contracts. BTW, the latest interesting wrinkle in the Northeast is the explosive growth of cheap bus fares (I now often use Vamoose rather than Amtrak--door to door the time can be about the same since Vamoose drops me off in Bethesda rather than Union Station, and the fare--with the frequent rider discount--$20 one way). Virtually every bus I ride is full; on Amtrak, often my car only has a dozen people in it except at rush hour or approaching major holildays. I prefer the extra space to work and plug in my laptop on the train, but if all I need to do is read, the bus is adequate and up to $100 less each way). There are now 2 Jewish companies and several Chinese companies providing these cheap rides (not to mention the traditional Greyhound and Trailways service). I would love to see some statistics on the ridership of the buses vs. Amtrak on the NY-Washington route.

Edward Lincoln, Director
Center for Japan-U.S. Business and Economic Studies
NYU Stern School of Business

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Re: Policy Innovations - The Carnegie Council's online magazine for a fairer globalization.

Re: Policy Innovations - The Carnegie Council's online magazine for a fairer globalization.