AFTER taking office in September, Hirohisa Fujii, Japan’s finance minister, widely let it be known that he was happy with a strong yen. But he had not anticipated that the currency would so soon become a bolt hole for panicky investors fleeing turmoil in world financial markets.
Fears of a renewed bout of financial turbulence caused by Dubai World’s debt standstill this week drove the yen to a 14-year high against the dollar on Friday November 27th, its strength exacerbated by thinly traded markets because of America’s Thanksgiving holiday. The rally, which coincided with a slump in Japanese and other Asian stockmarkets, as well as a decline in most of the other widely traded currencies, forced Japan’s new government to convene to discuss its impact on the economy and, possibly, to reconsider its non-intervention line.
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Mr Fujii, who once said that intervention was only necessary as a result of “outrageously reckless” currency movements, hinted that he was now prepared to discuss it with his G7 counterparts. In that he was goaded on by some of his cabinet colleagues. He complained, with plenty of justification, that the yen’s appreciation was “one-sided”.
Just the hint of action was enough to drive the yen off its highs. But there was only a half-hearted belief that Mr Fujii or his G7 counterparts were ready to strike. Currency experts in Japan see the rise in the yen from 101 half a year ago to around 85 now as symptomatic more of dollar weakness than yen strength–it stems from the sluggishness of the American economy. Although there are howls of protest from Japanese exporters, currency strategists say the yen is not significantly overvalued. Because of huge differences between Japanese and American inflation over the past 15 years, Tohru Sasaki, chief currency strategist at JPMorgan, calculates that the yen would need to hit 57 per dollar to match its strongest post-war level of 79 yen per dollar reached in 1995.
Yet such calculations, however valid, may miss the point. The trouble that Mr Fujii faces is that the steeper the yen’s rise, the greater the risk that Japan degenerates from a situation of mild deflation into a spiral of falling prices and wages, which would cause untold damage to itself and to the world economy. Already, deflation is looking increasingly entrenched; on Friday the government announced that core consumer prices fell by 2.2% in October, the eighth straight month of decline.
Until very recently, the authorities have appeared to be relaxed about living with moderate deflation and a strong yen, hoping that over time the economy, which has rebounded faster than expected in recent quarters, would heal itself. That belief was partly reinforced by Japan’s past experience of deflation, which ended temporarily in 2006 when the economy exported its way back to growth.
However, back then, the world economy was also expanding fast and globalisation made it easy to conquer new markets. Now the American and European economies are far weaker, and though Japan’s exports to Asia have grown this year, they do not counteract the sloth elsewhere. On top of that, Japan’s domestic market is crippled by a shrinking population, low wages and weak demand, which adds to the huge deflationary output gap in Japan, according to some estimates as high as 8% of GDP.
Intervention to weaken the yen would carry a cost in terms of irritating Japan’s main trading partners. As Mr Fujii has noted, currency interventions can quickly lead to a round of competitive devaluations. But if he does raise the issue with his G7 counterparts, which he should, he should also stress the price impact of an excessively strong yen. If Japan were to fall into a deflationary trap, it would not suffer alone. Markets might quickly worry that over-indebted, slow-growing economies such as those of America and Britain were headed in the same direction.:SugarwareZ-068::SugarwareZ-068::SugarwareZ-068:
Fears of a renewed bout of financial turbulence caused by Dubai World’s debt standstill this week drove the yen to a 14-year high against the dollar on Friday November 27th, its strength exacerbated by thinly traded markets because of America’s Thanksgiving holiday. The rally, which coincided with a slump in Japanese and other Asian stockmarkets, as well as a decline in most of the other widely traded currencies, forced Japan’s new government to convene to discuss its impact on the economy and, possibly, to reconsider its non-intervention line.
Click here to find out more!
Mr Fujii, who once said that intervention was only necessary as a result of “outrageously reckless” currency movements, hinted that he was now prepared to discuss it with his G7 counterparts. In that he was goaded on by some of his cabinet colleagues. He complained, with plenty of justification, that the yen’s appreciation was “one-sided”.
Just the hint of action was enough to drive the yen off its highs. But there was only a half-hearted belief that Mr Fujii or his G7 counterparts were ready to strike. Currency experts in Japan see the rise in the yen from 101 half a year ago to around 85 now as symptomatic more of dollar weakness than yen strength–it stems from the sluggishness of the American economy. Although there are howls of protest from Japanese exporters, currency strategists say the yen is not significantly overvalued. Because of huge differences between Japanese and American inflation over the past 15 years, Tohru Sasaki, chief currency strategist at JPMorgan, calculates that the yen would need to hit 57 per dollar to match its strongest post-war level of 79 yen per dollar reached in 1995.
Yet such calculations, however valid, may miss the point. The trouble that Mr Fujii faces is that the steeper the yen’s rise, the greater the risk that Japan degenerates from a situation of mild deflation into a spiral of falling prices and wages, which would cause untold damage to itself and to the world economy. Already, deflation is looking increasingly entrenched; on Friday the government announced that core consumer prices fell by 2.2% in October, the eighth straight month of decline.
Until very recently, the authorities have appeared to be relaxed about living with moderate deflation and a strong yen, hoping that over time the economy, which has rebounded faster than expected in recent quarters, would heal itself. That belief was partly reinforced by Japan’s past experience of deflation, which ended temporarily in 2006 when the economy exported its way back to growth.
However, back then, the world economy was also expanding fast and globalisation made it easy to conquer new markets. Now the American and European economies are far weaker, and though Japan’s exports to Asia have grown this year, they do not counteract the sloth elsewhere. On top of that, Japan’s domestic market is crippled by a shrinking population, low wages and weak demand, which adds to the huge deflationary output gap in Japan, according to some estimates as high as 8% of GDP.
Intervention to weaken the yen would carry a cost in terms of irritating Japan’s main trading partners. As Mr Fujii has noted, currency interventions can quickly lead to a round of competitive devaluations. But if he does raise the issue with his G7 counterparts, which he should, he should also stress the price impact of an excessively strong yen. If Japan were to fall into a deflationary trap, it would not suffer alone. Markets might quickly worry that over-indebted, slow-growing economies such as those of America and Britain were headed in the same direction.:SugarwareZ-068::SugarwareZ-068::SugarwareZ-068: