WHICH country has the world's most undervalued currency? Most people would answer China. Yet by many measures the Japanese yen is cheaper than the Chinese yuan. It cannot be long before America and Europe put Japan in the dock, and accuse it of keeping its currency unfairly low.
since 2001 the Bank of Japan (BoJ) had been printing loads of money in order to defeat deflation. An increased supply of yen relative to that of other currencies pushed down its price. But the yen's softness this year is a puzzle. Since the BoJ abandoned “quantitative easing” in March, Japan's monetary base has withered. Deflation has gone away, and in July the BoJ raised interest rates, which had been stuck at zero for five years. Furthermore, Japan had a whopping current-account surplus of $165 billion in the year to July (the latest figure for China, for 2005, is only $161 billion, although it is expected to rise in 2006). In many respects, the yen should be climbing.
Instead, since March it has fallen slightly against the dollar and by as much as 8% against the euro, which fetched a record ¥150 earlier in September, before edging back up a bit. Since mid-2001 the yen has fallen by around 35% against the euro, while against the weaker dollar it is little changed. Japanese exporters have also gained competitiveness relative to South Korea, where the won has risen strongly against the dollar during the past year.
Not only is the yen cheap in nominal terms, but many years of falling prices in Japan have made it even more competitive. Its real trade-weighted value fell this month to its lowest since 1982 (see chart). The latest update of The Economist's Big Mac index (see article) showed that the yen was by far the most undervalued of the developed world's currencies—ie, hamburgers are cheapest in Tokyo. Using a more sophisticated model, Stephen Jen, of Morgan Stanley, reckons that the yen is 12% undervalued against the dollar, whereas the yuan is only 7% too weak. Against the euro, the yen is almost 30% below its fair value.
When Japan changes Prime Ministers, it usually is no big deal. After all, with rare exception, the same party has been in control since the 1950s. But not this time. The new man at the helm is evoking a rare sense of foreboding both in Japan and across the Asian region.
Shinzo Abe is a series of contradictionsÂ…the first prime minister born AFTER World War Two, and yet one of the most nationalistic prime ministers in decades. His grandfather served as prime minister after the war, a time when American occupiers imposed a pacifist constitution.
Yet Abe is openly talking about renouncing the pacifist part of this document. “I am going to put this firmly on the table for discussion,” he said. No wonder he woke up on his first day as prime minister to see an editorial cartoon depicting him as a hawk.
And many do not want change. Japanese lawyers sang at this concert to protest Abe and celebrate a country that renounced force and they want it to stay that way.
“The constitution was our promise and determination to repent what we had done and renounce war,” says Takao Takahashi. “I still believe that.”
JapanÂ’s military is one of AsiaÂ’s most sophisticated with its American made jets and state of the art American Aegis class missile-equipped destroyers. But under the current constitution, all this can only be used in self-defense. Even when Japan sent troops to Iraq, it was on a humanitarian mission.
But memories run long in Asia, of the last time Japan used force in the 1930s and 40. Its military was known for massacres and rapes in the Asian countries it conquered.
It took the atomic bomb to bring Japan’s military to its knees and this became the root of Japan’s pacifism – the only country to be attacked with the bomb.
Philosopher George Santayana said those who cannot remember the past are condemned to repeat it. Which is exactly what many in Asia do not want.
Takashi Tachibana, a political expert whose work led to the resignation of the late Prime Minister Kakuei Tanaka in the 1970s, is concerned that Japan could get nuclear weapons under Prime Minister Shinzo Abe.
He said during a recent speech at the Foreign Correspondents' Club of Japan that although Abe may not want to go nuclear, people like Kyoto University professor Terumasa Nakanishi, whom Abe relies on heavily for advice on foreign policy, wants U.S. nuclear weapons in Japan on condition that Tokyo has the right to order a nuclear strike, Tachibana said.
While this position is not widely accepted, the professor said chances are high that it could catch on with the recent deterioration of the public's feelings about nuclear-armed China and North Korea, which also is believed to have atomic weapons.
Tachibana said he was also concerned that there are few people in leadership positions who would openly oppose having or using nuclear weapons, saying the situation is similar to the 1930s, when the government made a series of decisions that led the nation to war.
"I wouldn't say Abe's Cabinet will immediately move in that direction (of going nuclear), but . . . a very tragic consequence is possible when taking into account" all of these factors, the professor figured.
Calling Abe a "truly serious nationalist and conservative," Tachibana said the first baby boomer prime minister does not accept the postwar values Japan has nurtured under its laws, illustrated by his keenness to amend the Constitution and the basic education law.
If Abe's government reinterprets the Constitution to allow the country to participate in collective defense, as Abe also wants, Tachibana warned that Japan would become deeply entangled in any future wars the U.S. might wage.
He also argued that because of his admiration for his grandfather, the late Prime Minister Nobusuke Kishi, Abe has many blind spots about history, including criticizing the opposition to Kishi's highly unpopular revision in 1960 to the U.S.-Japan security treaty, which resulted in his resignation the same year. Tachibana said the treaty was forced through the Diet, causing widespread public fear that democracy might be in jeopardy
"It is very dangerous if Abe's political fighting position is modeled after his grandfather," Tachibana said.