Is Mr Yen the right man for the IMF? - Brief Article

Business Asia, Dec 13, 1999 by David DeRosa

Japan's former vice-minister for finance Eisuke Sakakibara, dubbed Mr Yen, has been touted as a candidate to become the next chief of the IMF. David DeRosa(*) has some reservations

Somebody please wake me up. I must be having a nightmare because Japan wants Eisuke Sakakibara, the retired vice minister of finance for international affairs, to be the next chief of the International Monetary Fund.

Japanese Prime Minister Keizo Obuchi and Finance Minister Kiichi Miyazawa want Sakakibara, known by the moniker "Mr Yen", to get the job being vacated by IMF chief Michel Camdessus.

Sakakibara running the IMF? Saints preserve us! I can't think of a worse choice.

Well, there are other bad choices.

Germany's Oskar Lafontaine, the former minister of finance, or Brazil's Itamar Franco, who governs the state of Minas Gerais, would be pretty awful too. But unlike Lafontaine and Franco, Sakakibara might have a real shot at getting the job.

My beef with Mr Yen is that I, unlike he, deeply believe that markets work better without regulation. The world's economy works more smoothly when ministers keep their hands off the forces of supply and demand.

What made Sakakibara's days at the ministry of finance so damaging is that he thought it was his duty to micro-manage foreign exchange and other financial markets.

His own record speaks volumes -- the man never saw a price, whether it was an exchange rate or an interest rate or a stock index, that he didn't want to manipulate. Prices for him weren't part of market mechanisms that equilibrate supply and demand.

Rather, they were nuisances that stood in the way of his management of the economic system, which at times had all the subtlety of a sumo wrestler's body crush.

Sakakibara sat at his desk at MOF and waged a relentless campaign to manipulate the dollar-yen exchange rate. At times, the yen was too strong for his liking. Other times it was too weak. The yen had to move to his target, and do so on his time schedule, or there would be hell to pay.

Japanese bond and stock markets were also treated to his personal brand of paternalistic meddling. And what good did it do? Today in Japan they refer to the 1990s as the lost decade, for which Sakakibara and his pals in power should be held accountable.

Sakakibara recently expounded on his theory of why guys like him are so useful to the world: "Because cyber-capitalism is unstable, we need to come up with a system to stabilise it." He went on to say "I'm afraid we may see another crisis or two in the next four to five years".

What makes the Sakakibara nomination all the more dangerous is that he could be running the shop as the IMF's role in the international economy is redefined.

Nobody is happy about what the IMF did to Indonesia and Korea. It's true the IMF acted decisively in its rescue of those countries from the brink of financial implosion. The problem is that it went too far in making its own agenda for deep social and economic reforms as a condition for financial aid.

But it is the IMF's handling of Russia that takes the cake.

By the least damaging interpretation, the IMF looked the other way while Russian's central bank squandered billions of dollars of Fund money in the unsuccessful attempt to preserve the value of the rouble in the summer of 1998.

The IMF was created in 1944 as part of the Bretton Woods Agreement. Its purpose was to lend financial assistance to nations that found it difficult to maintain their currency's exchange rate within the Bretton Woods parity grid of fixed exchange rates.

Fixed exchange rates for major currencies ceased to exist in 1973 when US President Richard Nixon floated the dollar. Some people think the IMF should have been put out of its misery right then and there.

Yet the Fund managed to redefine itself as a sort of global financial watchdog. That role was subjected to trial by fire several times in the last three years, when it had to respond to crises in Asia, Russia and Latin America.

Now as the Camdessus era draws to a close, it is proper that the nations of the world reassess just what kind of role the IMF should have in the international monetary system.

Should the IMF continue to be the emergency rescue service for financially beleaguered nations? If so, should it have the power to force a nation that becomes its ward to tow the line on social reforms?

Maybe the IMF should be told to close its doors. Let international investors and governments work things out for themselves.

Right now there's intense manoeuvring as each country tries to promote its favourite candidate to be the next IMF chief. If finance ministers of the world have any respect for the concept of a free market, they will not give the IMF to Sakakibara.

(*) David DeRosa is president of DeRosa Research and Trading and manages an investment fund. He is also an adjunct finance Professor at Yale School of Management.