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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

ASIAWEEK EXCLUSIVE INTERVIEW: JANUARY 6, 2000

Mr. Yen's World
An interview with "liberated" ex-bureaucrat Sakakibara Eisuke
Page 1 | 2

Since stepping down as Japan's vice minister of finance for international affairs in July 1999, Sakakibara Eisuke arguably never left the limelight. Dubbed "Mr. Yen" for his unique influence over the currency's movements, he now heads Keio University's Global Security Research Center and is an adviser to Salomon Smith Barney, a subsidiary of financial-services giant Citigroup. The former bureaucrat seems to relish private life. Recently, he made waves by criticizing Bank of Japan governor Hayami Masaru for what Sakakibara said were ambiguous statements on monetary policy. Tokyo has touted the 58-year-old economist as a candidate to be the next International Monetary Fund (IMF) chief. Sakakibara concedes he is unlikely to win the post, but that doesn't appear to bother him. During a 90-minute interview in Hong Kong with Editor Ann M. Morrison, Assistant Managing Editor Ricardo Saludo and Senior Correspondent Alejandro Reyes, he delivered insights on Japan, Asia and the world, laughing frequently and heartily. Here is the expanded online interview:

Where is the yen heading?
The Japanese government is determined to stop the yen from appreciating further. There are lots of options. The yen is at about 102 [to the dollar]. Once you break 100, the rate is likely to head toward 90 or 80, and that is something that needs to be avoided at all costs. To do that, it is quite important for the Japanese government to show it is determined never to let the rate appreciate beyond 100. The way to do it is to drive the rate toward 110 with aggressive intervention, hopefully with the announcement of easing of monetary policy. That is what needs to be done and I think [Finance] Minister Miyazawa [Kiichi] and my successor Vice Minister Kuroda [Haruhiko] feel the same way with regard to the need to stop further appreciation. I have been predicting that within a month or two, the Japanese government is likely to intervene very aggressively to drive the yen toward a rate of 110. There are a couple of favorable factors that make such intervention possible. First, the market is long on the yen. Once market participants see the trend being reversed, it is likely that they will reverse their long position. They will have some cover. Another thing is that Japanese life insurance companies have sold a significant amount of dollars and euros in the futures market, and it is likely that they will modify that position in the months of January and February. There will be very strong demand for both euros and dollars from institutional investors. Given those factors, the likelihood is not small that intervention could be effective.

Is 110 the appropriate level for the yen?
I should never talk about the level, but what I can say is that it should not break 100. Because if it does, the move beyond could be very rapid as 100 is a symbolic level. In 1995, when it broke 100, it went quickly to 79 within a matter of two to three months. That is the sort of movement we don't like to see. It is difficult to decide what the appropriate level isŠunless you have a currency board. [Laughs]

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Asiaweek Interview Home

What about the stock market?
The Nikkei has been very strong primarily because of purchases by foreign investors plus Japanese individuals. It looks like the IT revolution is going to take place in Japan. Nasdaq Japan will be created [this] year and the Tokyo Stock Exchange has already created a new section [for emerging companies] called Mothers. So next year, there will probably be a boom in IPOs of venture businesses and small-to-medium-sized corporations. This boom in IPOs from 2000 to 2001 is likely to drive the Nikkei upward. Of course, the Japanese economy is recovering although the basis of the recovery is still fragile. But since foreign investors have been excessively pessimistic, various signs of recovery that will appear in the next two to three months would probably entice further foreign investment in Japanese stocks.

But you said that it is the foreign investors who are already driving the Nikkei?
The foreigners came in first in the early part of 1999. They receded temporarily during the summer, but they have come back during the fall. But as the New Year comes in, I think it is likely that foreigners will increase their investments further. Now lots of investment funds are being sold to Japanese individuals. With the Big Bang [financial liberalization], banks are allowed to sell investment funds and individuals are now buying into those funds. That will increase as well. Internet trading has become quite widespread. All these factors will probably push the Nikkei toward 20,000 and within six months or so, it may exceed 20,000. I don't think that is too optimistic a forecast. Money left Asia in 1997 and 1998 and it's only natural that funds come back sooner or later. I think they are coming back.

Japan's third-quarter growth results were disappointing. Put that performance in context.
Third-quarter growth was -1% but there was an upward revision for the second quarter from 0.1% to 1%. The forecast for the third quarter was around zero. The upward revision for the second quarter and -1% growth for the third quarter more or less come out to zero for the two quarters. The fourth-quarter number, given various data we've been seeing in October, November and early December, will probably be a small plus so the government forecast for fiscal 1999 [ending in March 2000] will probably be revised upward toward 1.0%. But I think this is a little bit on the cautious side. I wouldn't be surprised to see something like 1.5% for fiscal 1999. I was talking with [Hong Kong financial secretary] Donald Tsang and he said Hong Kong would probably make 2.0% for 1999. I don't think our fiscal-1999 growth rate will reach 2.0%, but it may be very close.

In the year 2000, the key will be plant and equipment investment. This will come back strongly. The question is the timing. Now machinery orders, which is a prior indicator for plant and equipment investment, are increasing. If you take surveys among corporations, you now get results that say the plant and equipment investment in 2000 will show positive growth over the previous year. It will probably center on the information and telecommunications areas, that is, computers and so on. It's a question of timing and how strong it is.

Will there be any further fiscal stimulus?
Government stimulus will continue in the next budget. I think easy monetary policy will be continued; the zero-interest-rate policy will be continued; and fiscal stimulus will be continued at least to the end of fiscal 2000. Plant and equipment investment will come back during the course of 2000. At this point, additional fiscal stimulus beyond 2000 is not something we have to consider. It depends. But we have enough fiscal stimulus and the easy monetary policy is there. Private demand is now coming back.

What about the budget deficit?
It has increased. But there is widespread misconception about the Japanese budget position. Japanese outstanding gross debt is indeed above 100% of GDP which is close to Italian levels, but net debt is only around 36% or 37%, which is the lowest of G7 countries. In economic analysis, it makes more sense to use net debt instead of gross debt. We have very large amount of assets in the social-security fund. If you subtract those assets in the social-security fund from the gross debt, you get the net-debt figure. Although the net debt figure has increased very significantly over the last five years, it is still the lowest among the G7 countries. So the Japanese fiscal situation is not as bad as perceived by the market and the press. Of course, the minister of finance is responsible for that. Having held the purse, they have always say, "We don't have enough money." [Laughs]

What about monetizing the debt?
Monetizing the debt is not necessary. A significant part of the present deficit is due to the cyclical downturn so the structural deficit is much lower than the actual deficit. The best strategy to improve the budget position is to have a robust recovery, then corporate profits will increase and profit taxes will increase. If we have a robust recovery in 2000 and 2001, the budget position will be improved quite significantly. After that, in the medium term, we may have to consolidate our fiscal position further. But that could be postponed until the recovery is very robust. We may eventually have to think about increasing VAT. The consumption tax is now 5%. We may have to raise that to 10% or 15%, the level in European countries, but that is a medium-to-long-term objective, not an immediate need. We need to concentrate for the next year or two on having a very robust recovery. We have to make sure that it will be sustained.

How can Japan do that?
One thing I have emphasized is that the yen exchange rate should not appreciate in any dramatic way. You need to have a stable exchange rate. You need to continue the easy monetary policy. I have argued that an easy monetary policy is necessary and the Bank of Japan could ease the monetary policy further. Private demand is coming back and the non-performing asset problem is now being resolved. Banks are now making profits so the worst is over. The Japanese economy hit the bottom in the fourth quarter of 1998. If you look at the GDP numbers, that is a fact. We are slowly recovering at this moment so we have to make sure that this recovery will be robust.

What happens if the worst-case scenario happens and the yen appreciates beyond 100 to the dollar?
The recovery will be delayed. That happened in 1994-95. We should have recovered in 1994 but between 1994 and 1995, the yen appreciated from 120 to 80 and that delayed the recovery by a year and a year and a half. Even if the yen appreciates, it will eventually come back down. But that will delay recovery.

How is corporate restructuring proceeding?
Quite dramatically. Major structural change is now taking place in Japan. This is still happening below the surface, but you've been noticing lots of mergers, new entries. Even a company like Sony now wants to get a banking license. Ito-Yokado, which has network of 7-Eleven all over the country, now wants a banking license. Softbank may go into the financial sector. So it's a dramatic sea change for the financial sector. The same thing is happening in the cellular phone area and the Internet. All kinds of Internet businesses have sprung up. You have a large number of venture businesses and even the big companies like Toyota and Sony are going into that area as well. It's a major structural change.

Of course, it's happening all over the world. It has happened in the U.S. It is taking place in Europe, now Japan and Asia -- Hong Kong, Korea and eventually China. This is the major structural change of the world economy which parallels the Industrial Revolution. It is an information and telecommunications or IT revolution. Japan, after all, has some fundamentals to [warrant being part of] this process. The potential Internet population in Japan is very high and cellular-phone technology is quite advanced. Probably cellular-phone technology in Japan and Europe is more advanced than in the U.S. So the infrastructure is there. We have now come out of the unprecedented financial crisis of 1997 and 1998. We are starting a new round of growth based on information and telecommunications. Evolutionary change will probably take place in the mass media. [In Japan,] lots of new television stations will be created next year. NTT and others will go into that business. A whole range of new developments is taking place.

Outside the IT sector and finance, is anything happening in the traditional industries?
Electric power is moving into the information area and the chemical sector is upgrading its technology level. So this revolution is spreading into other industries as happened in the U.S. Traditional carmakers, steelmakers and shipbuilders are still somewhat depressed. But for example, Toyota is interested in the IT business. They are major partners in a new telecommunications venture. This IT revolution is spreading throughout the entire economy. It hasn't really reached the full spectrum of the economy. There is the phenomenon in the market called "two-tier movement." Growth industries such as telecom and information technology are pulling up the Nikkei while traditional companies are stagnant. Still, the Nikkei is rising, but eventually, those stagnant companies will come into the growth area.

Do you see any signs that the restructuring is getting as far as the government?
Yes, lots of young people are now resigning [from the government]. [Laughs]

What are your views on the economies of the rest of Asia?
In the 21st century, starting from 2001, Asia will probably become the growth center of the world. There are two reasons. The crisis has made Asian economies much stronger compared to the pre-crisis period. Indonesia has eliminated a substantial amount of cronyism. It is now a democratic country. And South Korea has done a lot of reforms, including chaebol restructuring, which could not have been done without the crisis. Donald Tsang told me Hong Kong has also reformed by taking advantage of the crisis. He could never have combined the two markets before if the Hong Kong growth rate were at 7%. [Laughs] The same thing could be said of Japan. New reforms were implemented during the crisis. All those structural reforms that have taken place have made the foundation of Asian economies much stronger than before the crisis. The Chinese or Japanese have a proverb that says: rain makes the soil much stronger. That is what has happened in Asia in 1997 and 1998.

Another thing is that Asia is probably well fit for the IT revolution or Internet age. We have a large class of fairly well-educated people in China, Japan and India. Look at the way that corporations are partial to some Indian cities because at least part of the Indian population is well-versed with computer technology. We need those technicians. And we can train them in the future. The Internet revolution is quite favorable to this region. The U.S. has taken the lead, but as I said, a fairly substantial portion of those venture businesspeople and engineers are Asian. They could come back with their new innovations. And there is a vast population in this region. I think that given this irreversible IT revolution, Asia is very likely to be the growth center of the world again. So the [study] project that I am now organizing as a professor at Keio University will be entitled "East Asian Miracle Revisited." I'm going to argue that the East Asian Miracle will take place again in the 21st century.

Early in the century?
Yes, yes, early in the century. It is beginning to happen.

You have spoken about how we are likely to experience more crises during the transition to a "cyberspace economy" over the next four-to-five years.
We suffered from a major crisis of global capitalism in 1997 and 1998. We have now embarked on the reform of the international financial system. But the measures we have come up with are more or less interior decorating, not a major reform. So the crisis-prevention measures to avoid the contagion are not sufficient. We haven't really solved the problems yet. For example, if you allow capital to freely move across borders, you need some kind of lender of last resort. We still don't have that. So countries are now preparing themselves for what [Bank of England Deputy Governor] Mervyn King called a do-it-yourself lender of last resort. You accumulate foreign reserves and you have some contingent borrowing arrangement with the private sector in case of a crisis and you start to develop some kind of internal mechanism for the crisis. Those things are happening but at this moment I don't think we can say we have all the mechanisms to avoid a future crisis. I would say that because the immediate crisis is over, there is some complacency. Cyber-capitalism is extremely unstable. I've been talking about the IT revolution. It's a major progression. It will probably drive the world economy upward. However, it is a very volatile, aggressive train which may cause a crisis again. This is a very dynamic, creative-destructive process because of the speed information and money is moving around. Domestically, we have central banks as lenders of last resort, but internationally we don't have that. The fact of life is that the world is becoming one big market. We need to have a mechanism.

Could the lender of last resort be the Bank for International Settlements or the IMF?
I don't know, but we need to have a mechanism. We don't have it now. Logically, you have either free capital movement with the kind of speed and magnitude we have with a lender of last resort or capital controls. We don't have either one of the two. We don't have to have permanent capital controls. If we have free capital movement, then we need some kind of lender-of-last-resort mechanism. I wouldn't be surprised if the crisis came back three or four years from now. The most likely place that could happen right now is the U.S. [Laughs]

Because of the market bubble there?
I wouldn't call it a bubble, but the U.S. has sucked in about $800 billion over the course of the last two years and their net foreign debt is now above $1.5 trillion. They need $1 billion each working day to sustain this situation. This is not possible so the U.S. either has to hard land or soft land. A soft landing is possible. I am not predicting a collapse in the U.S. market. However, a hard landing is also possible. We should be careful. Of course, the U.S. has good administrators -- [Federal Reserve Chairman Alan] Greenspan and [Treasury Secretary Lawrence] Summers. I'm sure they can handle the situation. However, the risk is there. It's not a sustainable situation: a $1-billion flow of new capital and a negative savings ratio. But I think they can manage it. The U.S. economy is still very strong. But anything could happen.

How does an Asian Monetary Fund (AMF) fit into a possible solution?
The AMF is one of the three do-it-yourself lender-of-last-resort mechanisms I have mentioned. You either accumulate your reserves, have some arrangement with the private sector, or have a regional fund. If the global mechanism is not there, you need to have some kind of regional mechanism. It does not have to be a monetary fund. It could be an arrangement among central banks, some kind of swap arrangement -- multilateral or bilateral -- or some kind of agreement among regional countries with regards to crisis lending or cooperation. The whole idea of regional cooperation is proceeding, although gradually. There are now discussions among China, Korea and Japan going on. ASEAN countries are inviting Korea, China and Japan to participate in their cooperative schemes. It has started to move and that is good. But I don't think a monetary fund can be established in a short period of time. There can also be cooperation in settlement and cooperation among capital markets. Nasdaq in Hong Kong and Nasdaq Japan could cooperate. There is a whole range of financial cooperation [initiatives] we need to embark on. It is very important. Asia generates a large amount of savings, but what happens is that those funds first go to New York and London and then come back in U.S. dollars with the exchange-rate risks. So you need to develop a market here, either a bond market or capital market, where you can raise the capital in your own currencies. The integration of two markets in Hong Kong is a step forward. If you can raise Asian money in Asian markets, that would be one of the strongest crisis-avoiding measures. What we have learned in the past during the crisis is that we have depended too much on the U.S. dollar, too much upon global financing mechanisms through New York. So we need to develop regional markets where regional money could be recycled.

Page 1 | 2

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