Once again it is time to stop sitting on the sidelines and griping about politics and actually come up with a productive solution for a change. One simply cannot stand by here in Japan and watch as the government digs a financial hole for itself, deeper and deeper. The yen resists any attempt to hold it down and despite huge government purchases of US dollars to weaken the yen, the Japanese currency pops back up stronger than ever. There really is only one solution, and it surprises me that this has not even been discussed.
Japan should switch to the dollar.
No, I am not kidding.
Let's look at the numbers.
First, how many dollars are actually out there?
There is a total of a few more than 800 billion dollars in circulation, most of which is outside the United States. Japan already holds about one point one trillion dollars of foreign currency reserves, and we can guess that the bulk of that amount is held in dollars (a lot of it in bonds, etc., not paper money).
The information that I got from the Bank of Japan* for the total amount of Japanese currency in circulation (again much of it held overseas) is about 50 trillion yen, or at current rates, only 640 billion US dollars.
In other words, the goal of obtaining enough greenbacks to replace the yen currency is already within the grasp of the Japanese government; this is a doable thing.
What would be the benefits of switching currencies?
1. Exporters would no longer need to worry about fluctuations in currency values affecting their bottom lines. Trading with the US would make Japan very much like a domestic US company since employees' salaries, subcontractors' charges, and even local Japanese taxes would all be dollar denominated. Exports would remain competitive, and revenues from these exports would not lose value due to a rise in currency values.
2. Japanese companies would have the advantages of local US companies but none of the disadvantages since they would not have to pay US federal or state taxes. This might result in a repatriation of many of the manufacturing jobs that have been exported to the US over the past 30 years. These could be allocated to the disaster stricken areas and provide a huge lift to the local economies there.
3. Natural resource suppliers are usually paid in dollars, so this switchover to the US currency would stabilize prices for these key supplies.
4. Japan's foreign exchange reserves, much of which is held in US Government bonds, would suddenly show good returns (relative to Japanese investments) and would no longer lose large amounts of value due to currency exchange fluctuations. US bonds bought only as long ago as 2001 would have cost the Japanese government 121.05 yen per dollar. If those bonds matured today (11/7), they would be worth only ??? per dollar, a whopping loss of ???%.
5. China seems to be trying to undermine Japan's effort to weaken its currency, so a switch to the US dollar would completely eviscerate that kind of underhanded geo-political move.
(No offense, China.)
6. The costs of printing new bills, and dealing with old money would be sent off-shore, saving the Bank of Japan millions of dollars in printing and currency management processes.
7. By attaching its financial system to the greenback, Japan's S&P rating would go from its current AA– to a more attractive AA+. Since the currency is the US currency, however, the Japanese government, like individual states in the US, would not be in the position of having to pay interest on bonds other than those they issued. The higher rating would tend to make that interest rate lower.
8. Suddenly being adopted by the number three economy on the planet, the dollar would immediately strengthen in value, giving Japan's economy a huge boost at a time when they desperately need that additional leverage.
9. Interest rates would go up giving Japanese consumers a better return on their investments.
Of course, it would not be a completely rosy change. What would be the deficits of such a move?
1. ATM machines, banks and bankers and the economy as a whole would have to be retooled to accept the new money.
2. Japanese coins would have to be "reinnumerated" so that they could be continued to be used for some time, as getting US coinage would be problematic. This would not be a big problem: the 500 yen coin would be $5, 100 yen $1.00 and so on down the list. While this may look like a one-to-one hundred dollar-yen exchange, way higher than the current rate, this would not necessarily be the rate that Japanese currency would be purchased by the government from consumers. The use of the coinage in this way would take place after the paper money was already in circulation.
3. It would remove the Japanese yen as one of the top foreign reserve currencies, forcing other nations to put more of their reserves into other currencies, probably the US dollar. Japan would lose its unique access to international borrowing.
4. Interest rates would go up making mortgages and other capital purchases more expensive. In the same way that state by state interest rates in the US are very nearly the same, Japanese rates would inevitably fall into step with them as Japan's banks and lending institutions would be using the same currency.
5. The "touchy-feely" aspects of having your own currency would be lost, but the Euro community did it (so far), and I haven't heard a lot of whining about not being able to use Lira, Francs, or Deutsche Marks recently.
While the minuses of such an action seem troubling, none of them is insurmountable and the benefits of the switch are so clearly worthwhile that the Japanese government should take immediate steps during this current round of dollar purchases to get enough of the currency to implement this plan.
There... now that THIS is taken care of, I can go back to sitting around and doing nothing useful again.
Where's the wine?
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*Thanks to the Bank of Japan for helping me get some of this data. Cheers!
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