Japan boasts a more mature and stable economy than its fast-growing Asian neighbours, and the country's vice-minister of finance for international affairs hopes that the country's role as a leading practitioner of financial diplomacy in the region is backed up by its banks.

Today’s Japan is a quieter and less newsworthy country than it was in the 1980s, when US sociologist Ezra Vogel’s book Japan as Number One painted it as the world’s most dynamic, best organised industrial society. But running an aggressively successful and widely admired or envied economy is not necessarily the best qualification for hosting the joint annual meeting of the World Bank and International Monetary Fund (IMF), as Japan will be doing in October.

Takehiko Nakao, vice-minister of finance for international affairs at Japan's Ministry of Finance and the country's most senior international financial official, can probably think of plenty of reasons why Tokyo is better placed for taking this job today than it would have been in the euphoric 1980s. At least as important as the conference itself is having leading international financial officials in town for a week, which should go some way to refreshing the world’s sometimes jaundiced view of Japan.

Mr Nakao is not ashamed to claim that while some of its neighbours may be more dynamic, today’s Japan is “mature, sedate and stable”.

Profile raising

It is clear that Mr Nakao and his colleagues are keen on developing Japan’s role as Asia’s leading practitioner of financial diplomacy. As an example of Tokyo’s positive role in the region and beyond, Mr Nakao notes that Japan led other Asian countries in early 2011 into supporting the IMF’s plan to create a 'war chest' to help deal with global financial emergencies, not just in the eurozone, but anywhere.

"Except for the EU, which collectively lent $200bn, our contribution of $60bn made us the first and biggest contribution to the fund, and Tokyo provided a lead for half-a-dozen Asian neighbours [including China] to follow," says Mr Nakao. "We also played a part in persuading the IMF to set the fund target at an attainable $400bn."

The IMF fund is one example of the kind of financial diplomacy that is viewed with pride in Tokyo but would have been impossible a generation ago. Mr Nakao is also keen to present Japan as an initiator and co-ordinator of the Chiang Mai Initiative (CMI) on currency swapping between the 10 member countries of the Association of South-east Asian Nations plus Japan, China and South Korea (the so-called ASEAN+3). The CMI was launched in 2010 and has so far taken in swaps worth $240bn in 2012. 

Separately, moves between Japan and China have been taking place to promote use of the yen and renminbi in mutual trade and investment. This is one of several responses to the dollar liquidity shortage that disrupted Asian trade and investment after the Lehman Brothers bankruptcy in 2008. Mr Nakao foresees similar arrangements, but he is emphatic that the US dollar will remain fundamentally the most important international currency in Asia for the foreseeable future.

The way these arrangements have gone ahead without apparently alienating the IMF or the World Bank contrasts with the aftermath of the Asian financial crisis in 1997, when one of Mr Nakao’s predecessors proposed to establish an Asian Monetary Fund (AMF) to supplement the IMF’s efforts in Asia. The idea provoked an angry response from the US.

The IMF and Asia

Today the AMF affair looks like ancient history. What has changed since the 1990s is that the IMF has returned to the very centre of global finance, says Mr Nakao, following a sidelining after the end of fixed-currency exchanged rates and the decline of its role, after the Asian crisis, as mentor of distressed developing countries.

This central role is reflected in the IMF’s crucial action in the euro crisis, but also raises the question of whether it is reasonable to preserve the tradition, dating back to its foundation at the post-war Bretton Woods conference that the IMF managing director should always be from Europe (while the head of the World Bank is always a US national).

On this issue, Mr Nakao chooses his words carefully. While heaping praise on current IMF managing director Christine Lagarde, he says leadership of the IMF  “should be based on merit not nationality”. It is not clear whether this issue will come up in October. If it does, Japan will probably avoid being explicit but may make very clear its view that the current system needs to change.

Mr Nakao, though, does not respond eagerly to the suggestion that, given the country's size and importance, Japanese nationals might have been expected to head more international economic institutions. What he wants instead is for Japan to be able to play a constructive and creative role at any level in global finance, and in return he hopes for appreciation of the country. Today’s Japan may not be as dynamic as many of its neighbours but is “rational, clean, pretty and interesting”, says Mr Nakao, and the time is ripe for foreign observers to notice what it has achieved.

Looking out rather than in, he believes it is time for Japanese banks with solid balance sheets to become more actively involved in Asian lending. Japanese manufacturers, he adds, should use their reserves of cash and the availability of dollar loans from the government for mergers and acquisitions in Asia and beyond. They can do this because business leaders should by now have learned the hard way to make useful acquisitions. This was not the case in the 1980s when Japan was flush with money and companies bought large chunks of the US, which made headlines but not much else.

Overvaluing the yen

Mr Nakao refuses to see overseas acquisitions as hollowing out Japan’s domestic economy. Instead he cites the case of a major medical instrument maker, which recently bought a Canadian company whose product range neatly complements its business in Japan. The yen’s strength against the dollar, he adds, has created a rare and favourable climate for Japanese companies to acquire a significant global presence.

A problem with this rosy picture is that the yen is beyond being just comfortably strong. It is probably seriously overvalued with the current US dollar rate drifting between 76 and 78, up about 30% from the year of the Lehman Brothers crisis. And Japan is not just a wealthy and stable country. While it boasts huge private savings and the world’s largest overseas assets, it has a larger ratio of public debt to gross domestic product (230% gross) than any other developed country, including the distressed peripheral members of the EU.

Mr Nakao declines to suggest a realistic rate for the yen but claims it is “substantially overvalued”, not “moderately overvalued” as the IMF said in recent report on Japan. He says the government “should watch the foreign exchange market carefully and, if there is excessive volatility or disorderly movement, take decisive action… At the same time, regarding foreign exchange, we keep in close communication with other authorities.”

In the past two years, Japan's Ministry of Finance has intervened four times in the exchange market, three times alone and once (after the earthquake and tsunami of early 2011) in unison with other countries. Mr Nakao challenges the view that successive interventions have begun to lose their impact.

At the root of the yen problem there is a clear link with the problems of the eurozone, since the weakness of the euro has left the yen as almost the only currency which dealers regard as having “haven” status (ie. rightly or wrongly as being exempt from the woes of lesser economies). The coming IMF World Bank meeting certainly will not change this situation, but it might help to promote understanding from its peers of Japan’s apparently chronic currency plight.


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