After locking horns with U.S. officials for two decades, Japanese financial authorities have developed a fine art for avoiding Washington’s reproach whenever the yen exchange rate drifts too low for America’s liking.Their latest lobbying victory was sealed when the Group of Seven industrialized nations gave indirect approval to the monetary stimulus measures that have caused the yen to lose 17.5% against the dollar in five months and enraged many of Japan’s competitors. By arguing that such policies are driven by “domestic objectives” and not by desires for weaker exchange rates, the G-7 gave a green light to further yen weakness, much to the relief of Japan’s powerful export industry. Even though the resulting selloff was later cut short as various G-7 officials suggested that the group still harbored some concern about the yen’s swift descent, the document itself reads as a clear endorsement of Prime Minister Shinzo Abe’s efforts to pressure the Bank of Japan into a more accommodative policy stance.
It is worrying that Prime Minister Abe shows disregard for the Bank of Japan’s independence and perhaps he should avoid uttering the word “yen.” But the truth is Japan needs a weaker currency. The rest of the world will just have to get used to that.
Japan Needs Weaker Yen; U.S. Has No Right to Complain
ReplyDeletehttp://online.wsj.com/article/SB10001424127887324162304578301922181699596.html
After locking horns with U.S. officials for two decades, Japanese financial authorities have developed a fine art for avoiding Washington’s reproach whenever the yen exchange rate drifts too low for America’s liking.
Their latest lobbying victory was sealed when the Group of Seven industrialized nations gave indirect approval to the monetary stimulus measures that have caused the yen to lose 17.5% against the dollar in five months and enraged many of Japan’s competitors. By arguing that such policies are driven by “domestic objectives” and not by desires for weaker exchange rates, the G-7 gave a green light to further yen weakness, much to the relief of Japan’s powerful export industry. Even though the resulting selloff was later cut short as various G-7 officials suggested that the group still harbored some concern about the yen’s swift descent, the document itself reads as a clear endorsement of Prime Minister Shinzo Abe’s efforts to pressure the Bank of Japan into a more accommodative policy stance.
We’ll never know exactly how the Ministry of Finance’s foot soldiers won the Americans over, but it is fair to speculate that the G-7′s most influential member was partly persuaded by a desire not be seen as the pot calling the kettle black.
Let’s face it, the only real difference between the Bank of Japan’s newly instigated bond-buying campaign and the one the Federal Reserve has deployed on and off is that the Fed’s–which exceeds $2.5 trillion over four years–has been bigger and longer lasting. Japan is merely catching up. And whether deliberate or not, the yen’s weakness in response to the BOJ’s money-printing is no different to how the dollar has periodically fallen in response to the Fed’s “quantitative easing” efforts.
The Bank of England has also employed QE and other central banks have been far more direct in targeting exchange rates: the Swiss National Bank SNBN.EB +1.67% with its CHF1.20 “floor” for the euro versus the Swiss franc and the People’s Bank of China’s closely managed yuan trading range. With all these other options taken off the table, and with the euro succumbing to a crisis, the yen strengthened significantly in the pre-Abe period, hitting record highs right after the 2011 earthquake. It was the only “safe haven” option left– but hardly a worthy one.
If ever there were a country in need of looser monetary policy, it is Japan. Gripped by a deflationary death spiral for two decades and bearing an aging population that is facing public debt levels worth more than 220% of GDP, it is imperative that Japan inflate its way back to economic health.
The government’s role in the yen’s decline is also being overstated. Although Mr. Abe and his cabinet ministers have expressed satisfaction with the weakening yen, they have not once directly intervened in currency markets, unlike numerous predecessor administrations. And although the BOJ has acceded to the prime minister’s forceful demands that it target a higher 2% inflation rate, many economists believe its December announcement of an additional Y10 trillion ($106 billion) in bond purchases is insufficient to make a difference.
What deserves to be getting more blame for the yen’s decline is the serious deterioration in Japan’s external balances. Whereas Japan used to run a perpetual net savings balance–a scenario that underpinned a strong yen–it now runs current account deficits and record-high shortfalls in its trade account as its once-mighty exporters struggle to keep up with competitors from South Korea, Taiwan and China.
ReplyDeleteRobert Tipp, chief investment strategist at Prudential Fixed Income, traces this reversal to the Fukushima nuclear disaster following the earthquake of March 2011, after which the government turned to a no-nuclear policy–and, incidentally, coincided with a new record high in the yen. All of a sudden, an energy deficient country had to rely on expensive imports of fossil fuels to cover its needs, which as Tipp points out added significantly to Japanese companies’ costs and “put them behind the eight ball” against other Asian competitors, which had been forced to become more energy efficient in preceding decades.
It is worrying that Prime Minister Abe shows disregard for the Bank of Japan’s independence and perhaps he should avoid uttering the word “yen.” But the truth is Japan needs a weaker currency. The rest of the world will just have to get used to that.