A pedestrian views a display showing the exchange rate between the Japanese yen and US dollar in Tokyo on October 26. The continued weakness of the yen is raising fears among some observers that, if left unchecked, other Asian economies might respond by weakening their currencies and starting a race to the bottom. Photo: EPA-EFE
Opinion
The View
by William Pesek
The View
by William Pesek
Why Japan letting the yen weaken risks stirring up global hornet’s nest
Stand-offs between Japan and currency traders over a weak yen are nothing new, but the stakes now are higher than ever and have global implications
If Tokyo policymakers aren’t careful, their dithering could spark devaluations across Asia and a backlash from US politicians struck with election fever
As the Japanese yen breaks through 150 to the US dollar, investors can’t help but entertain the four most dangerous words in economics: this time is different.
Global finance has seen more stand-offs than it can count these last 25 years between Tokyo and currency traders. Japan favours a weak yen to boost exports and corporate profits while financiers often think the exchange rate has fallen too far. This fuels near-constant tension.
The stakes of the current stalemate, though, are higher than ever with the yen at 33-year lows. What happens in the days and weeks ahead – whether yen bulls or Tokyo bureaucrats win out – could be a game changer in places from Beijing to Washington and everywhere in between.
This is the first time Japan’s Ministry of Finance has tussled with speculators in what might be called the “China crisis age”. President Xi Jinping’s team has so far avoided a huge reckoning for China Inc., but 2024 is looking dicey for Asia’s biggest economy and a weaker yuan would surely help stabilise growth.
The China of 2023 has its own “this time is different” vibe. Even as top-line growth confounds sceptics, microeconomic cracks scream not to believe the hype. The default drama in the property sector, a major pillar of China’s economy, echoes Japan’s 1990s bad-loan debacle in all the worst ways.
Even as banks such as JPMorgan Chase and UBS now say China could hit this year’s 5 per cent growth target, foreign capital can’t seem to exit its markets fast enough. Look no further than the recent bloodbath in mainland tech stocks.
16:50
Can China learn lessons from Japan’s ‘lost 30 years’?
Can China learn lessons from Japan’s ‘lost 30 years’?
That is because, below the surface, financial cracks are deepening. This reduces the odds Xi’s team will have the broadband or the daring to recalibrate growth engines in favour of the private sector or the ability to multitask to build the social safety nets needed to increase domestic demand.
As challenges mount, no economic lever might reap bigger or quicker benefits than a weaker yuan. So far, Xi’s team have avoided the exchange rate option.
One worry is that it would run afoul of Xi’s pledge to let market forces play a “decisive” role in Beijing’s decision-making. Another is it could increase the risk of giant developers defaulting on offshore debt. Finally, Xi hardly wants to see China on the US Treasury Department’s next currency manipulation watch list.
A weaker yuan could be appealing to Chinese policymakers as questions about economic growth continue to mount, but such a move would come with significant risks. Photo: dpa
However, the yen is giving Xi geopolitical cover to do just that. If Washington objected, China’s Finance Ministry or the People’s Bank of China could simply bring up the yen’s 14 per cent plunge this year.
Here, it’s worth considering the “this time is different” dynamic in the United States. Despite two impeachment trials and four indictments, former US president Donald Trump continues to control one half of the US two-party system. That system is spoiling for a brawl with Asia as the 2024 election heats up.
About the only thing on which the Trump-dominated Republican Party and US President Joe Biden’s Democrats agree is being tough on China. Biden has been much harder on China than Trump was from 2017 to 2021. Trump’s tariffs and weird social media rants were a hassle for China’s economy, but Xi’s government found ways to navigate around the chaos.
The Biden era has been different. Biden has methodically, surgically and relentlessly limited access to the vital technology Xi’s “Made in China 2025” project needs to thrive.
In the interim, expect a bull market in anti-China rhetoric and policy proposals as Republicans and Democrats bash China and the Communist Party. A weaker yuan would be a gift to Washington. The attack ads write themselves: China is stealing US jobs again.
The yen’s trajectory matters in another big way: Asia doesn’t tend to do well during episodes of great Japanese exchange rate volatility. An unintentional side effect of 24 years of zero interest rates is that Japan is the top creditor nation. Since 1999, when the Bank of Japan (BOJ) first cut rates to zero, hedge funds and other investors have been borrowing cheaply in yen. Next, they redeploy those funds in higher-yielding assets everywhere.
This explains why sudden zigs and zags in yen exchange rates can pull the floor out from investors anywhere in the world. The last decade supersized this dynamic and the risks inherent to yen gyrations. In 2013, the government empowered the Bank of Japan to take quantitative easing to new levels. It effectively nationalised the stock market.
By 2018, the BOJ achieved a dubious milestone: its balance sheet had topped the size of Japan’s then-US$4.8 trillion economy. It was a first for a Group of 7 nation, and Tokyo is now dealing with the fallout for the yen’s resulting tumble.
01:58
American tourists flock to Japan to take advantage of weak yen, strong US dollar
American tourists flock to Japan to take advantage of weak yen, strong US dollar
A weak exchange rate has Japan importing inflation faster than it wanted. The quantitative easing that the BOJ pioneered between 2000 and 2001 didn’t end deflation – Russian President Vladimir Putin did. Russia’s invasion of Ukraine has boosted global energy and food prices. A weak yen left Japan vulnerable to a sudden inflation surge. Now comes the unfolding crisis in the Middle East, which could push oil prices even higher.
This is an Asia-wide challenge, of course. Officials who normally favour weak currencies worry about inflation and about capital fleeing their economies.
But if the yen falls towards 160, China, South Korea and much of Southeast Asia might engage in a chaotic race to the bottom that really would make this time different. Japan must be careful about kicking this most global of hornet’s nests.
William Pesek is a Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades”
