The Magazine


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.

True, other parts of the Pacific Rim might find this policy temporarily uncomfortable, perhaps even frightening. The Chinese have voiced concerns, although it is not clear why; China does not compete directly with Japan, and Japanese recovery is absolutely essential to China's economic success. The Europeans might also be less than thrilled given their concern with payments problems for their troubled banks in South Korea and Indonesia in particular. But from the standpoint of the future of the United States and Japan, at a time when Japanese trade deficits with America are ballooning, Rubin's instincts were right on the mark. Too bad everyone flinched. President Clinton may now have a much less eventful trip to China, with no messy and embarrassing global market complications. But one gets the feeling that an opportunity has been lost. There is indeed a cost to conflict avoidance.

Bob Rubin was no doubt embarrassed to be praised for the intervention, because he understands quite well what is going on in Japan. Indeed, he probably understands better than many Japanese advocates of the status quo would like him to.

David M. Smick is founder of Johnson Smick International, which advises large global financial institutions, and editor/publisher of the International Economy magazine.