Japan’s finance minister is adamant. It “absolutely” cannot tolerate excessive movements in the yen. No one asks him to do otherwise. What the country can do — and has made an encouraging start — is accept prolonged weakness in its currency. There is little appetite to design a significantly different outcome. The wisdom of trying at this point would also be questionable.
It’s time to believe that Japan accepts a weak yen
The magic number of 150 yen to the dollar came and went Thursday without fireworks. Traders are ready to step in, but big hairy numbers have rarely meant as much in practice as they have in market lore. It matters more that the yen collapses rather than crossing the line. The past few days have featured none of the drama that accompanied the Bank of Japan’s first-of-a-generation yen purchases last month.
Japan’s policy towards its exchange rate aims to cushion the decline of the yen. Mounting a sustained effort to prevent the pullback, let alone stave off a sustained rally, would only mean one thing: a dramatic change in the relative interest rate spread between Tokyo and Washington. The BOJ is under little pressure to abandon its ultra-dovish stance characterized by keeping 10-year government debt yields near zero.
This means that any change in momentum must come from the Federal Reserve. Barring a deep trauma in global finance that scalds the US economy, there is a slim chance that President Jerome Powell will pivot before the end of the year. The Fed is weighing its fourth consecutive 75 basis point hike in its benchmark rate and forecasts for its peak in 2023 continue to be raised with each drop in inflation.
None of this is to say that the yen bruise is insignificant. It’s down about 23% this year, the most of any major currency. But just about everyone else took some sort of hit. The Australian dollar, euro, British pound and Korean won were hammered. The 17% decline in the won is instructive: the Bank of Korea began raising borrowing costs last year, months before the Fed, European Central Bank and Bank of England. This did not spare the Korean currency. Seoul also intervened but was very clear about its intention. “We just want to control the speed,” BOK Governor Rhee Chang-yong told the Peterson Institute for International Economics in Washington last week. Unless the Fed changes, “the bet is on one side,” Rhee said. Why fight against that?
Maybe traders should, for once, believe what Japan has told them. Finance Ministry officials were careful to stress that they were not seeking to defend a specific line in the sand, but that the intervention is aimed at the frenzied pace of the yen’s movements, which makes it difficult for companies to calculate the costs. import and export and plan for the long term.
Prime Minister Fumio Kishida started talking about how to use the weak yen, rather than fight it, promising to support 10,000 businesses to take advantage of the currency. BOJ Governor Haruhiko Kuroda, generally blamed as the chief architect of the current weakness, has been telling everyone who listens for months that he won’t raise rates – not now and seemingly never, with only a few months to go in his mandate.
It’s not hard to see why he’s so set in his ways. Not only is it not the Bank of Japan’s job to care about the level of the yen, but there may really be no good option to change things. Unlike measures to weaken the currency, which Japan could theoretically do indefinitely because it only needs to keep selling, intervention to strengthen the yen is limited by the ammunition of its reserves. Officials must choose their shots carefully. The $20 billion spent on intervention last month had little impact on the currency’s underlying direction.
Second, Kuroda is right to stick to his arguments: for Japan, raising rates to a level that would significantly narrow the gap with the US would be disastrous for the economy. If you thought the turmoil in the UK gilt market has led to unexpected chaos in recent weeks, imagine what would happen in the world’s most indebted country if money was no longer free. The cost of servicing Japan’s vast debt pile would rise, increased fiscal and defense spending plans would fade, and households would be devastated by an increase in variable rate loan repayments, which accounted for more than two-thirds of loans. last year’s mortgages.
As in so many other things, Japan simply has to navigate the waters that the United States (in this case, the Fed) charts. The Fed is the only body that can change this narrative. In the meantime, Japan just has to find the silver linings: relocating manufacturing lost when the yen was strong, convincing companies like Taiwan Semiconductor Manufacturing Co. to put more production in Japan, and rebuilding the country’s tourism sector in an even better state. form.
More from Bloomberg Opinion:
• Tourists will love the yen. Will Japan like them? : Gearoid Reidy
• Ask the markets to capitulate, better to bounce back: John Authers
• Japan’s FX intervention highlights Kuroda’s isolation: Daniel Moss
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was Bloomberg News’ economics editor.
Gearoid Reidy is a Bloomberg Opinion columnist covering Japan and the Koreas. He previously led the breaking news team in North Asia and was the deputy chief of the Tokyo bureau.
More stories like this are available at bloomberg.com/opinion