Japan should devalue the yen by almost a quarter and set an inflation target to stop prices from falling and pull the economy out of a 12-year slump, former president Lee Teng-hui (
"To get out of deflation, Japan should peg the yen at 160 to the dollar," Lee said in an interview. "By setting a 3-to-4-percent inflation target and devaluing the currency," Japanese companies and consumers will be encouraged to spend more, he said.
Falling prices, which erode corporate profits and boost the cost of repaying debt in real terms, are pressuring Prime Minister Junichiro Koizumi to come up with measures to combat a near-record jobless rate and bankruptcies that averaged 53 a day this year.
The economy, recovering from its third recession in a decade, may not grow this year, according to a government forecast.
The yen was at 122.17 to the US dollar at 2:14pm yesterday in Tokyo, compared with 121.87 late Tuesday in New York.
A government report last month showed prices fell 0.9 percent in September from a year earlier. Prices haven't risen from year-earlier levels in any month since April 1998, and the central bank has said it will keep interest rates close to zero until nationwide core consumer prices start increasing.
Japan's unemployment held at 5.4 percent for a fifth month in September, just below a record high.
"Koizumi should take the leadership" to persuade other nations about the need to peg the yen at 160, Lee said. "It shouldn't be a problem for Taiwan."
Lee's views remain influential in Asia, said Takeshi Minami, a senior economist at UFJ Capital Market Securities.
"There aren't that many figures who are so outspoken about these issues," Minami said. "Even though he's already distant from the mainstream political line, what he says is something that people still listen to."
The yen's 7.8 percent rise against the dollar this year is also hurting Japanese exports by making goods from cars to computer chips more expensive in foreign markets. Exports fell for a fourth month in September, threatening to cut short Japan's recovery from its third recession in a decade.
The biggest obstacle to pegging the yen at a weaker rate to the dollar would be the relationship with the US and China, Lee said. Still, Koizumi should discuss the issue with the US and convince President George W. Bush, he said.
A devaluation of the yen would make it harder for the US and China, which maintains its currency at a fixed value to the dollar, to compete with Japan.
"On the currency issue, Japan should show a clear attitude" toward China, he said.
Lee also said fighting deflation is "more a political leadership issue" than an economic problem.
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