For the first time in years, Japan is looking forward to a visit by a US Secretary of the Treasury.
John Snow arrives here in Tokyo next week amid growing optimism about the world's second-biggest economy.
It's a far cry from a year ago, when Japanese officials still relished trips to the dentist more than meetings with US Department of the Treasury people. Tokyo received myriad Washington tongue-lashings for not contributing more to global growth.
With stocks up 20 percent this year and some economists predicting an end to deflation, Tokyo couldn't be happier to welcome Snow. Yet there's a bigger reason Tokyo can't wait to see Snow: to plot strategy on China's currency policy.
Snow and Japanese Finance Minister Masajuro Shiokawa have been urging Beijing to abandon its eight-year policy of fixing the yuan at 8.277 to the US dollar. Both Washington and Tokyo think the dollar's 9 percent slide in the past year is making Chinese exports artificially cheap.
Japan is especially keen on seeing the yuan rise because it would lessen China's competitive advantage in Asia. But neither fin-ance officials nor investors should get ahead of themselves. A Plaza Accord-like move to strengthen the yuan isn't afoot, and might not be for some time.
China should indeed widen its trading band for the yuan. If Beijing trusted markets to set the currency's value, perhaps markets would have more confidence in its policies.
The government talks a great deal about free-market approaches toward its economy, but here is a way to act on that talk.
Revaluing the yuan could catapult China's economy past some of the world's biggest. Overnight, it could arguably become larger than France's or the UK's, giving Beijing the increase in global stature it desires. Also, a firmer currency would make it cheaper for China to amass oil reserves and other commodities.
But Beijing isn't likely to budge. To understand why, look no further than recent comments by Jin Renqing (
Just as "some of the major economies are experiencing a sort of destabilization of their economic development, it is of utmost importance that China maintain a stable growth," Jin said in Manila earlier this month.
Five years ago, then-US Treasury Secretary Robert Rubin lauded Beijing for not devaluing, a step many thought would worsen the Asian crisis. Rubin routinely called China an "island of stability."
After preaching the merits of currency stability, the US and Tokyo are now trying to sell Beijing on the merits of flexibility.
It's not working. For Beijing, the yuan is a control issue.
Remember that for all the excitement and hype over China's 8 percent growth, it's still a developing economy and a centrally planned one at that. A stable yuan is the cornerstone of it all.
If there are two taboos in the Chinese political psyche, they are change and uncertainty. Freeing the yuan would mean embracing both. Before that happens, Beijing (a) needs to feel certain a stronger yuan won't slam growth, and (b) that the global economy really is recovering.
It all comes down to confidence and it's not clear how much of it Beijing really has in its economy. We all know the spin about China's booming population, soaring wealth and vibrant cities. What's less clear is how a change in currency policy would affect its underlying financial system, which is more rickety than many investors appreciate.
Its banking system is harboring a bad-loan problem that could be worse than Japan's. China figures it can grow its way out of the problem, but that's a dubious plan when you consider Tokyo has been trying it for 13 years now. It's also the best reason to expect Beijing to move first to re-peg the yuan at a less competitive rate than letting it float freely.
That China's financial system isn't ready to withstand a free-floating currency can be seen in the breakdown of investment flowing there.
When it comes to foreign direct investment on the part of multinational companies, China's success is indisputable.
Last year it was the world's biggest recipient of it. Less impressive is its success in attracting institutional investors.
Concerns about corporate governance have kept many investors away.
So have uncertainties about whether China can maintain the 7 percent plus growth needed to create jobs for the millions who will be displaced during the transition from socialism to capitalism.
Just as many investors are taking a wait-and-see approach, Beijing is taking the same attitude toward altering its currency policy.
And the US and Japan need to tread carefully here and avoid jawboning China at next week's summit of Asia-Pacific finance ministers in Phuket, Thailand.
The last thing Beijing wants is to appear to be buckling to demands from the economic elites.
Each time Washington and Tokyo call on China to let the yuan rise they make such an outcome less likely.
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