Time for Japan to Get Tough
By Katie Martin
It’s time for Japan to stop playing Mr Nice Guy.
The country has been holding back from currency intervention for months, but the case for action is becoming overwhelming.
After all, why not intervene? The yen is clearly far too strong. It hit a 15-year peak against the dollar last week and remains elevated on a trade-weighted basis, or simply by comparison with other regional heavyweights like the yuan or the won.
And this is clearly hurting. Just take a look at the gross domestic product data released earlier Monday. Japan’s economy grew by a seriously floppy 0.1% in the second quarter of this year. Economists had predicted a rise of 0.6%. Wobbly exports are a big reason for this weakness, and the strong yen has to take part of the blame as it makes Japanese products more expensive abroad.
What’s more, the rise in the currency is completely out of whack with economic fundamentals. Japan has a massive debt burden, no growth, interest rates at zero, a deflation problem, grim demographics… you name it.
Traders have been buying the yen but not because they are positive about Japan’s prospects. No, it’s largely down to its role as a perceived safe haven, and even that makes no sense. The yen is not safe. It just tends to climb when markets get the heebeejeebies, because Japanese accounts are traditionally enthusiastic investors in overseas assets. When they get frightened, they sell up, buying yen in the process. Other traders, rationally enough, piggyback on this to make a nice little return. That doesn’t make the yen safe, it makes it a bet on safety.
So, here we have a currency that has snapped its link with reality and is causing damage to its economy. That’s reason enough for other countries to stop the rot. Why haven’t the Japanese authorities acted already, either by selling yen or by easing monetary policy further?
Some reasons make sense. One is that, at the moment, monetary policy is not in further easing mode. Intervention rarely works unless it’s in synch with the path of interest rates.
Another is that, while the yen’s climb has grim repercussions, it is not, in itself, disorderly. It’s not yet rising at the sort of pace which clearly calls for an official hand to slow it down.
The last main obstacle, though, is widely seen as the most significant, and it is also arguably the weakest: it lacks international support. Japan does not appear to have the go-ahead for a zap on the yen and, as a good global citizen fully signed up to the international mantra of freely-floating exchange rates, it appears to feel obliged to let the market do its work, for good or ill.
By Katie Martin
It’s time for Japan to stop playing Mr Nice Guy.
The country has been holding back from currency intervention for months, but the case for action is becoming overwhelming.
After all, why not intervene? The yen is clearly far too strong. It hit a 15-year peak against the dollar last week and remains elevated on a trade-weighted basis, or simply by comparison with other regional heavyweights like the yuan or the won.
And this is clearly hurting. Just take a look at the gross domestic product data released earlier Monday. Japan’s economy grew by a seriously floppy 0.1% in the second quarter of this year. Economists had predicted a rise of 0.6%. Wobbly exports are a big reason for this weakness, and the strong yen has to take part of the blame as it makes Japanese products more expensive abroad.
What’s more, the rise in the currency is completely out of whack with economic fundamentals. Japan has a massive debt burden, no growth, interest rates at zero, a deflation problem, grim demographics… you name it.
Traders have been buying the yen but not because they are positive about Japan’s prospects. No, it’s largely down to its role as a perceived safe haven, and even that makes no sense. The yen is not safe. It just tends to climb when markets get the heebeejeebies, because Japanese accounts are traditionally enthusiastic investors in overseas assets. When they get frightened, they sell up, buying yen in the process. Other traders, rationally enough, piggyback on this to make a nice little return. That doesn’t make the yen safe, it makes it a bet on safety.
So, here we have a currency that has snapped its link with reality and is causing damage to its economy. That’s reason enough for other countries to stop the rot. Why haven’t the Japanese authorities acted already, either by selling yen or by easing monetary policy further?
Some reasons make sense. One is that, at the moment, monetary policy is not in further easing mode. Intervention rarely works unless it’s in synch with the path of interest rates.
Another is that, while the yen’s climb has grim repercussions, it is not, in itself, disorderly. It’s not yet rising at the sort of pace which clearly calls for an official hand to slow it down.
The last main obstacle, though, is widely seen as the most significant, and it is also arguably the weakest: it lacks international support. Japan does not appear to have the go-ahead for a zap on the yen and, as a good global citizen fully signed up to the international mantra of freely-floating exchange rates, it appears to feel obliged to let the market do its work, for good or ill.
