The Magazine

THE PRESIDENT'S DOLLAR

Jul 6, 1998, Vol. 3, No. 42 • By DAVID M. SMICK
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IF YOU ARE CONFUSED over the adoring press coverage of Treasury Secretary Robert Rubin for his intervention in global currency markets, you're not alone. Rubin himself must be scratching his head.


Remember: Until Treasury's surprise move into the markets on June 17, Rubin had been ostentatiously not intervening while the dollar marched higher and higher against the Japanese yen. So his sudden effort to shore up Japan's currency needed some explaining.


The first admiring reports from Wall Street argued that Rubin, the clever former Goldman Sachs market wizard, had somehow deliberately tricked currency traders, who were betting heavily that the yen -- and the Japanese economy -- would continue to weaken. Rubin was intervening to rescue not just Japan and Asia, these reports said, but a U.S. stock market gloomily obsessed with Japan's sinking economy. And he was doing so in the most dramatic fashion possible.


The next wave of optimistic stories claimed that Tokyo, in fact, had finally seen the light and was ready with bold new policies to stimulate its economy and overhaul its banking industry. The new U.S. support for the yen, in this view, was supposed to be a well-timed reward for Japan's break-through.


Little of this has any relation to reality. True, the Japanese have hinted about setting up something called a bridge bank to collect bad bank loans. But the specifics could be months from materializing, if they ever do. Market insiders call this the "Tokyo Tease" -- economic reform pronouncements that somehow never materialize. Indeed, with the yen temporarily stabilized, Japanese officials strangely felt confident enough last week to attack Rubin himself. A senior Finance Ministry official told the New York Times, "I'm very much afraid that [Rubin] doesn't understand what's going on in Japan."


The truth is that Rubin may be one of the few in the Clinton administration who does understand what's at stake. That's why he was, wisely, staying out of the currency markets. The yen-support exercise, far from being a sign of Rubin's genius, was instead concocted in a hasty telephone call between President Clinton and Prime Minister Hashimoto, no doubt with the president's China trip at least partially in mind. And while it may have temporarily calmed both U.S. and Asian financial markets, the intervention may well come to be seen as a fruitless if not counterproductive gesture.


The yen has already weakened to the exact point where the Clinton-Hashimoto currency intervention took place. Worse, that exercise, announced so joyfully by the White House, came at the precise moment Rubin's hands-off, strong-dollar policy was starting to work. Before the intervention, Japan's Liberal Democratic Party leadership in the parliament had become so concerned about yen weakness that quick policy action was being considered. Now a lot of that pressure is off.


What Rubin understands is that Japan's policy community is in deep paralysis, bitterly divided over a host of issues. At least half -- the believers in the status quo -- want the yen supported at almost any cost for fear that further weakening of Japan's currency will all but destroy the banking system. The other half -- the reformers -- think that crisis conditions are the only conditions under which the badly needed, and expensive, restructuring of Japan's banking system will ever take place. Remember, Japan is not just another Asian economy, as Federal Reserve chairman Alan Greenspan has consistently pointed out. Japan is the second largest economy in the world, with ample resources to fix its horrible, non-performing bank-loan problem. Japan's problem is not money, but the lack of political will.


In a sense, the industrialized world is being forced to decide which is the greater priority: China and Southeast Asia or Japan? Rubin's hands-off, strong-dollar policy clearly recognized that a quick and sustained recovery of the Japanese economy is the far greater priority. That involves breaking Tokyo's policy logjam, which is what the strong dollar was intended to do. This policy has also kept long-term U.S. interest rates low and sustained America's recovery.