“Yen and Yuan”
RIETI, Tokyo
November 2, 2001
In the first half of his talk, Dr. Kwan, senior fellow at RIETI, argued that Asian
currencies should be pegged to a currency basket, with the Japanese yen comprising of a
bigger proportion of the basket for those countries that compete more with Japan (newly
industrializing countries, such as South Korea) and a smaller proportion for those
countries that have trade structures complementary to that of Japan (less developed
countries, such as China).
In the second half of his presentation, Dr. Kwan suggests that China will complement,
rather than threaten, Japan's economy. First of all, people overestimate China's
economic power. One should not confuse the growth rate of China's economy with its
size. China's is still only one-fourth the size of Japan's economy, yet its population is
ten times that of Japan. So China's per capita GDP is one-fortieth Japan's. If you take
into account purchasing power parity (PPP), China's per capital GDP increases to
one-eighth of Japan's, but its global rank falls from 128th to 140th.
Second, only 20% of the value added in Chinese high tech exports actually comes from
Chinese sources. In other words, China is highly dependent on foreign capital and
technology.
Third, China is not just Shanghai and Beijing. The countryside is very poor. China's
economic indicators now look like Japan's in the 1960s. This is to say that China is
forty years behind Japan in economic development.
Fourth, how much does China and Japan really compete with each other? China and
Japan only compete with each other on about 20% of their products. This share of
products has grown rapidly over the past ten years, but the level of quality is vastly
different. For example, China and Japan compete in selling television sets, but Japan
sells high-end flat screen TVs, while China's are very basic.
Fifth, the "flying geese" pattern of economic growth is still in place. METI says this
pattern has collapsed because of China. This is not true. Japan still maintains the
most advanced trade structure; China is still in back of the flying geese line.
Sixth, will China leapfrog in its economic development to challenge Japan? No.
China is still on the regression line, corresponding to its level of development. There is
no leapfrog so far.
Seventh, there is deflation in Japan, but here is good deflation and there is bad
deflation. The good sort comes from a shift in the supply curve, from cheaper exports,
which is good for Japanese consumers. Bad deflation, meanwhile, comes from a shift
in Japan's demand curve.
Finally, would a stronger yuan be good for Japan? No. The two countries do not
compete much, so all a stronger currency would do is slow the Chinese economy, thereby
slowing Japan with it. Good Japanese companies, such as Uniqlo, would be hurt for
the sake of helping a few farmers. Plus, the cost of production would increase inside
Japan.
Over the long run, he sees the yuan appreciating in real term because, among other
things, the growing economy will finally soak up excess labor, driving wages and
domestic prices, while industrial upgrading should improve the country's terms of trade
and strengthen the currency.
The question and answer sessions from this brown bag lunch lecture appear at the end
of this document. The following charts are taken from C.H. Kwan's presentation at
RIETI on November 2, 2001.
1
Yen and Yuan
The Impact of Exchange Rate Fluctuations on the Asian Economies
C. H. Kwan
RIETI
November 2001
2
The Yen-dollar Rate as the Major Determinant of Asian
Economic Growth
(Year-on-year, %)
-40
-30
-20
Stronger
Yen
Asian Crisis
Yen / US$
-10
0
10
20
(Year-on-year, %)
12
10
Asian Economic Growth
8
6
4
2
0
-2
(Year-on-year, %)
8
US Economic Growth
6
4
2
0
-2
-4
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00(e)
Note: Asia = NIEs + ASEAN + China
Source: Compiled by RIETI based on official statistics.
External Factors Affecting Asia's Economic Growth
Effect on Asia's Growth
1% Increase in Japan's Growth
0.1%
1% Yen Appreciation
0.1%
1% Increase in US Growth
0.3%
3
The Impact of a Stronger Yen on Asian Economic Growth
Positive Effects
Negative Effects
mIncrease in direct
investment from Japan
mHigher prices of
imports from Japan
mImprovement in export
competitiveness against
Japanese products
mHigher burden of
Yen-denominated
debt
Countries with trade structures competitive with Japan (e.g.,
South Korea) should benefit more than ones with trade
structures complementary to that of Japan (e.g., China) .
Korean Export Performance Hinges on the Yen-Dollar Rate
(Year-on-year, %)
-30
-20
Stronger Yen
Yen / Dollar Rate
-10
0
10
20
(Year-on-year, %)
40
Light Industrial Exports
Heavy Industrial Exports
30
20
10
0
-10
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
Source: Compiled by RIETI based on Korean trade statistics.
4
The Impact of a Stronger Yen on Asia
a) Gain in Export Competitiveness
Price
S
D’
D
Output
b) Higher Import Prices
Price
S’
S
D
Output
Source: Nomura Research Institute
Source: RIETI
5
Specialization Indexes for Major Categories of Manufactured
Goods (1999)
Manufactured
Goods Chiefly
Classified by
Material
-0.02
0.30
0.31
-0.10
-0.28
0.52
-0.08
-0.09
-0.54
0.19
Chemicals and
Related
Products
China
Korea
Taiwan
Hong Kong
Singapore
Indonesia
Thailand
Malaysia
Philippines
Japan
-0.40
-0.03
-0.28
-0.11
0.15
-0.31
-0.36
-0.29
-0.80
0.15
Machinery and
Transportation
Equipment
Miscellaneous
Manufactured
Articles
-0.08
0.28
0.11
-0.07
0.06
-0.04
0.05
0.13
-0.06
0.54
0.76
0.23
0.22
0.17
-0.09
0.84
0.69
0.34
0.33
-0.13
Source: Compiled by RIETI based on ADB，
Key Indicators of Developing Asian and Pacific Countries, 2000.
Comparison of the Trade Structures of Japan and Asian
Countries (1999)
(Correlation Coefficient)
Competitive
0.6
0.4
Singapore
Korea
0.2
Complementary
0.0
Philippines Taiwan
-0.2
Malaysia
Thailand
-0.4
Indonesia
-0.6
Hong Kong
China
-0.8
100
1000
10000
100000
(Per capita GDP in 1999, US$)
Notes
1) The degree of competition between an Asian country and Japan is calculated as the
correlation coefficient between their respective vectors showing the specialization indexes
([exports - imports]/[exports + imports]) of major categories of manufactured goods. To focus on
competition in the manufacturing sector, a four-category classification comprising chemicals
and related products (SITC Section 5), manufactured goods classified chiefly by material (SITC
Section 6), machinery and transport equipment (SITC Section 7), and miscellaneous
manufactured articles (SITC Section 8) is used.
2) The specialization indexes for Hong Kong, and thus its degree of competition with Japan,
have been distorted by the presence of re-export trade.
Sources: Compiled by RIETI based on ADB, Key Indicators of Developing Asia and Pacific
Countries , supplemented by trade statistics of individual countries.
6
Synchronization between the Yen-dollar
Rate and Korea's Terms of Trade
(Year-on-year, %)
Asian Crisis
-30
-20
Stronger Yen
Yen-Dollar Rate
-10
0
10
20
(Year-on-year, %)
40
Japan's Terms of Trade
20
0
-20
-40
(Year-on-year, %)
10
Korea's Terms of Trade
5
0
-5
-10
-15
-20
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
Note: Terms of trade
=
Export prices
Import prices
.
=.
Output prices
Input prices
Sources: Compiled by RIETI based on official statistics.
Pegging Closer to the Yen
m Stabilizing yen-dollar rate.
m Pegging to a currency basket in which the yen carries substantial weight.
m Assuming that the Korean won is pegged to a basket of currencies in
which the yen carries a weight of 70%, The Korean won is allowed to
appreciate (depreciate) by 0.7% when the yen appreciates (depreciate) by
1%, both against the U.S. dollar.
m “Optimal weight” of the yen reflects extent of competition with Japan.
7
Correlation between Asian and U.S. Economic Growth Rates
1971-84
0.731
0.139
0.584
0.857
0.705
0.461
0.436
0.545
0.537
-0.189
0.616
Asia
China
Korea
Taiwan
Hong Kong
Singapore
Indonesia
Thailand
Malaysia
Philippines
Japan
1985-98
-0.193
0.161
-0.298
-0.013
-0.102
-0.156
-0.321
-0.334
-0.343
0.204
-0.163
(1985-96)
0.175
0.262
-0.087
0.090
0.097
-0.074
-0.282
-0.068
-0.281
0.243
0.066
Note: Asia = NIEs + ASEAN + China
Sources: Compiled by RIETI based on official statistics of
countries concerned.
Counter-cyclical Movement of Real Interest Rates in Hong Kong
(1) CPI inflation turning negative
(Year-on-year, %)
25
20
CPI
15
10
5
0
-5
-10
(%)
(2) Real interest rate reaching a double-digit level
25
20
Prime Rate (U.S.)
15
10
5
Best Lending Rate (HK)
0
-5
Real Interest Rate
(Best Lending Rate -CPI)
-10
80
81
82
83
84
85
86
87
88
89
90
91
92
Sources: Compiled by RIETI based on official statistics.
8
93
94
95
96
97
98
99
00
The Yen/Dollar Rate and Japanese Exports to Asia
(Yen/$)
50
Yen / Dollar Rate
100
Stronger Yen
150
200
（Share of Total Japanese Exports, %）
250
45
40
China
35
ASEAN
30
25
20
15
10
NIEs
5
0
82
83
84 85
86
87
88
89 90
91
92
93
94 95
96
97
98
99 00
01
(1st half)
Source: IMF, International Financial Statistics and Japanese trade statistics.
The Yen-Dollar Rate as a Major Determinant
of the BIS Ratio of Japanese Banks
BIS Capital Adequacy Ratio
Capital
> 8%
Risk Assets
For Japanese Banks :
Capital (¥)
Risk Assets = Domestic Lending (¥) + Overseas Lending ($)
9
Comparison between Major Development Indicators of China
and Japan
China
（Latest ）
Life Expectancy (years)
Female
72
Male
68
(1998）
Infant Mortality Rate（
per thousand）
Japan
（Around 1960）
Female
72.92
（1965 ）
31
30.7
（1999）
Primary Sector as a Share of GDP(%)
（1960 ）
15.9
16.7
（2000）
Engel's Coefficient (%)
（1959 ）
39.2
38.8
（2000）
Per Capita Electricity Consumption (kwh)
Male
67.74
（1960 ）
1,071
1,236
（2000）
（1960 ）
Sources: China Statistics Abstract 2001, Japan's 100 Years (Kokuseisha).
Competition between China and Japan
Amount
Japan
China
(B)
(A)
C
Shoes
TV
Semiconductor
10
Product Sophistication Index ($)
Competition between China and Japan in the U.S. Market
($ billion)
1990
40
35
30
25
20
15
10
Japan
China
5
0
100
1,000
10,000
100,000
Product Sophistication Index ($)
($ billion)
1995
40
35
30
25
20
15
Japan
10
China
5
0100
1,000
10,000
100,000
Product Sophistication Index ($)
($ billion)
2000
40
35
30
25
20
15
Japan
10
China
5
0100
1,000
10,000
100,000
Product Sophistication Index ($)
11
Competition between Chinese and Japanese Products in the
U.S. Market
1990
1995
2000
(A） China's Manufactured Exports to U.S. ($, billion)
12.0
38.2
86.5
(B） Japan's Manufactured Exports to U.S. ($, billion)
84.0
114.1
134.3
3.8
11.9
27.9
(C/B） China as a Competitor of Japan
4.6%
10.5%
20.7%
(C/A) Japan as a Competitor of China
32.1%
31.3%
32.2%
(C） Overlapped Amount ($, billion)
The Flying Geese Pattern of Asian Countries Exports
(In Terms of Exports to the United States)
(Share)
Singapore
40%
35%
Taiwan
Malaysia
30%
Philippines
25%
Korea
Japan
Indonesia Thailand
20%
China
Hong Kong
15%
10%
5%
0%
100
1,000
10,000
100,000
Product Sophistication Index ($)
Per Capita GDP and Country Sophistication Index (2000)
Country Sophistication Index ($)
11
Japan
10
1,0000
Korea
Indonesia
9
Philippines
Malaysia
Taiwan
Hong Kong
Thailand
8
Singapore
China
1,000 7
6
5
5
6
1,000
7
8
12
910,000
10 Capita GDP11
Per
The China Factor in Japan's Deflation
Lower import prices
Price level
S
S'
D
Output
Demand shift to Chinese products
Price level
S
D
D'
Output
The Impact of Yuan Appreciation on Japan
Price level
S'
S
D
D'
Output
13
Real Effective Rate of the Yuan
人民元の実質実効為替
（90=100）
160
150
Versus Asian Currencies
対アジア
140
Stronger Yuan
↑
人
民
元
の
割
高
130
120
110
100
90
80
Versus Currencies of
70
対全体 Trading Partners
Major
60
90
91
92
93
94
95
96
97
98
99
00
Note: Export -weighted and based on WPI
Source: Nomura Research Institute
The Impossible Trinity
Full Capital Controls
China
Monetary
Independence
Exchange Rate Stability
Malaysia
Thailand
Hong Kong
Japan
Free Floating
Full Capital Mobility
14
Monetary Union
China’s GDP since Opening Up
1978＝1
30
Nominal
(In terms of Yuan)
25
20
15
10
Real GDP
5
Nominal
(In terms of US$)
0
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
（e）
Source: IMF, World Economic Outlook
Relative Nominal GDP among China, the U.S. and Japan
0.8
0.7
0.6
Japan / U.S.
0.5
0.4
China / Japan
0.3
0.2
0.1
China / U.S.
0.0
1970
1973
1976
1979
1982
1985
Source: IMF, World Economic Outlook
15
1988
1991
1994
1997
2000
Question & Answer
Q: I have never heard of a trade-weighted currency basket based on competitiveness
with Japan. It is dynamic. How would it be administered?
C.H. Kwan
The basket could be adjusted every five years to reflect changes in the region's
economies.
Q: What would be the objective of this exchange rate policy?
C.H. Kwan
Asia does not fulfill the requirements for a yen bloc yet. But the
exchange rate policy would be to stabilize regional economic growth
on complementary relations. This would sometimes require a
microeconomic level. But marcoeconomic policy should focus on the
objective of the
and trade, based
sacrifice at the
macro level.
Q: Japan is afraid of China because of the Chinese products that compete with
Japanese domestic products, not those that compete with Japan's internationally
traded products.
C.H. Kwan
I believe the US experience would be illustrative here.
Q: You say that developing economies are more complimentary to developed
economies. But actually developed economies seem more complimentary to
developed economies, while the rapidly growing developing economies are perceived
as a threat.
C.H. Kwan
We have to distinguish between national interests and the local interests (of, say, the
farmers). China bashing will ultimately hurt Japan.
16
Q: Isn't China different, though, given its population of 1.2 billion people and the
large market it offers. Countries just want to get into that market.
C.H. Kwan
China's accession to the WTO will reduce the need for foreign companies to rely on
foreign direct investment (FDI) to enter the Chinese market. Conceptually, going back
to the "flying geese" story, maybe China should be represented by three lumps (coastal,
middle, and western China) rather than just one big lump.
Q: Japan must focus on adding value to its exports. Is it possible for Japan to add
value to its manufacturing products?
C.H. Kwan
The difference between manufacturing and services has been blurred. But why is
Japan wasting its time trying to catch up with the US again? If Japan insists on
specializing in exporting cars, it will become a developing country itself.
Q: Will China adopt a floating exchange rate regime?
C.H. Kwan
Not in the near future. China has had a long-term plan to open its capital account, but
this has been slowed by the Asian financial crisis.
17