Masaaki Shirakawa: Reviewing the economies of Switzerland and Japan
Remarks by Mr Masaaki Shirakawa, Governor of the Bank of Japan, at the 30th Anniversary
Luncheon of the Swiss Chamber of Commerce and Industry in Japan (SCCIJ), Tokyo,
10 October 2012.
* * *
Before I begin, I would like to thank Chairman Thomas Jordan for his detailed and
informative presentation on the state of the Swiss economy and the issues faced by the
Swiss National Bank. I believe that everybody in this room would agree that we have learned
a great deal. In the next five minutes, instead of commenting directly on what Thomas has
just explained, let me offer you some thoughts that come to my mind when I look at the
Swiss and Japanese economies.
Switzerland and Japan are very different. Switzerland is land-locked. It is in effect an island
in the sea of the European Union, where about 60 percent of its exports are headed and
80 percent of its imports derive (Chart 1). Japan is far more populous. The Japanese
economy is about nine times as large as the Swiss economy. Nevertheless, there are
similarities. For example, both countries enjoy, or even suffer from, very stable prices. The
average annual inflation, measured by headline CPI, over the twenty years from 1992 to
2011 was 1.1 percent in Switzerland and 0.1 percent in Japan (Chart 2). In August this year,
the year-on-year change was -0.5 percent in Switzerland and -0.4 percent in Japan.
Consequently, interest rates are also low (Chart 3). In recent weeks, the yield on ten-year
government bonds has been hovering around 0.5 percent in Switzerland, slightly below
Japan's 0.7 to 0.8 percent range. Both currencies, as Thomas has explained, are at
historically elevated levels.
In this regard, the news media and the public are usually focused on a specific traded
exchange rate between currencies, such as the Swiss franc to the euro or the yen to the
U.S. dollar. These rates are important, but there are additional indicators for exchange rates.
In order to understand what would happen in an economy when exchange rates fluctuate,
exchange rates for all the trading partners must first be taken into account. From this
viewpoint, we must look at the nominal effective exchange rate, which is a trade-weighted
index of exchange rates. In the case of Switzerland and Japan, compared with January
2000, the nominal effective exchange rates in August 2012 were 41.4 percent and
17.4 percent higher, respectively (Chart 4).
Secondly, we also need to consider the fact that higher inflation will erode competitiveness.
In other words, further information could be derived from the real exchange rate, which is the
nominal rate adjusted for inflation. When a higher nominal exchange rate is offset by lower
inflation, the real exchange rate stays at the same level. Actual calculation of these rates is
admittedly difficult because of issues involved with comparing inflation between economies,
but the rates fluctuate considerably over the long term. For example, between January 2000
and August 2012, the real effective exchange rates for Switzerland appreciated by
12.5 percent, whereas Japan's depreciated by 19.3 percent (Chart 5).
More recently, between December 2007 and August 2011, the real effective exchange rates
for Switzerland and Japan moved in tandem with each other, appreciating by 16.9 percent
and 23.3 percent, respectively. These movements of the last few years are to an extent
representative of the fallouts from the Great Financial Crisis. The prevalent mood of risk
aversion resulted in the unwinding of carry trades. Both countries are now also confronted by
the so-called flight-to-safety capital flows. The appreciation of the two currencies coincided
with the most severe financial and economic dislocations in the advanced economies.
With regard to interventions in the foreign exchange market, in Switzerland, the Swiss
National Bank has the power to intervene. In Japan, the government - not the central bank -
is mandated by law to direct such interventions. The Bank of Japan is conscious of the
effects that the rapid appreciation of the yen could have on Japan's economy and inflation
outlook in terms of the conduct of the Bank's monetary policy. Concern over these effects of
exchange rate developments has been one of the factors that influenced the Bank's series of
decisions to further ease its monetary policy.
While both Switzerland and Japan suffer from strong exchange rates, I am also struck by the
dynamism of the Swiss economy. The U.S. dollar value of exports in Switzerland increased
by 192 percent between 2000 and 2011, a threefold increase, whereas the comparable
figure for Japan was an increase of 74 percent. Meanwhile, the domestic currency values
increased by 53 percent and 28 percent, respectively (Chart 6). Exports by the
pharmaceutical, precision machinery, and watches industries have increased considerably.
This is particularly remarkable in view of the Swiss franc's significant appreciation during the
period, which was more than the yen's, and such large shocks as the Great Financial Crisis
and the more recent turmoil in the euro area.
All in all, one often underappreciated benefit of globalization is the enhanced opportunity to
learn from each other's similarities and differences. Today, Thomas has provided us with a
valuable insight into Switzerland, and I hope that he can take something home from this visit
to Japan. Let me now conclude by thanking him once again for his superb presentation.
Thank you, Thomas.
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