Strong Yen ‘Not Necessarily To Japan’s Advantage’
In case you’re wondering about the sarcasm in the title, I am paraphrasing Emperor Hirohito’s World War II surrender speech, when he said that ‘the war situation had developed not necessarily to Japan’s advantage’. That was, of course, the biggest understatement I can think of, but the yen’s ascent to a fresh 13-year high of JPY87/US$ cannot be far behind.
I pity Japan’s present economic policymakers. They are the ones who had solid banks and had presided over one of the longest periods of economic growth in Japan’s post-war history. Alas, the global financial system then went into meltdown, and the Nikkei ended up suffering more than so many other stock markets – even though Japan had limited exposure to the US subprime mess.
And if that were not enough, the unwinding of the ‘global carry trade’ ensured that the yen subsequently soared in value even against a strong dollar, which is where we are today. Moreover, the yen is surging at the least convenient time, when Japan is already in recession, along with the developed world, meaning that it cannot export its way out.
Consider this: the yen is up around 20-25% against the dollar this year, and the dollar is up against most currencies. Then consider that the South Korean won, the currency of Japan’s main competitor in areas such as electronic goods, cars, ships, etc., is now down around 50% against the yen since its 10-year high seen in 2007. Even if external consumers were rushing to buy stuff (which they’re not), this shift in the KRW/JPY exchange rate cannot help but hurt Japan.
There is another problem with the strong yen. It could tip Japan back into deflation. Recall that even when Brent crude peaked at US$147.50/bbl in July 2008, Japan’s consumer price inflation rose only to 2.4% y-o-y – far lower than any country on earth. Now, with oil prices down 70% and Japanese consumer confidence at its lowest ebb, I would not be surprised if the country slid back into deflation – although this time it will probably not be alone.
So what can Japanese policymakers do? Alas, probably not much. Finance Minister Shoichi Nakagawa was quoted as saying that Japan would not intervene to weaken the yen, but in any case it’s not clear whether intervention would work.
The Bank of Japan could well cut interest rates on Friday, but they’re already 0.30%. True, it could theoretically halve interest rates forever, or return to zero, but that would be largely a symbolic step at this stage.
