Time to Believe Japan Is Accepting a Weak Yen


Japan’s finance minister is adamant. He “absolutely” can’t condone excessive moves in the yen. Nobody is asking him to do otherwise. What the countrydo — and has made an encouraging start toward — is accept prolonged weakness in its currency. There is little appetite to engineer a meaningfully different outcome. The wisdom of trying at this point would be questionable, too.

The magic number of 150 yen per dollar came and went on Thursday without fireworks. Traders are braced for intervention, but big hairy numbers have rarely meant as much in practice as they have in market lore. It matters more whether the yen crashes through rather than creeps across the line. The past few days have featured none of the drama that accompanied the first-in-a-generation yen purchases by the Bank of Japan last month. 

Japan’s policy toward its exchange rate is geared toward cushioning the yen’s decline. Mounting a sustained effort to prevent the retreat, let alone conjure a lasting rally, would mean only one thing: a dramatic change in the relative interest-rate gap between Tokyo and Washington. The BOJ is under little pressure to jettison its ultra-easy stance characterized by holding yields on 10-year government debt near zero. 

That means any shift in the dynamic has to come from the Federal Reserve. Barring a deep trauma in global finance that scalds the American economy, there’s only a remote chance of Chair Jerome Powell pivoting before the end of the year. The Fed is weighing its fourth consecutive hike of 75 basis points in its benchmark rate and forecasts for its peak in 2023 keep being raised with each depressing inflation number. 

None of this is to say that the yen’s bruising is trivial. It’s down about 23% this year, the most of any major currency. But pretty much every other one has taken some kind of hit. The Australian dollar, the euro, the British pound and Korean won have been hammered. The 17% retreat in the won is instructive: The Bank of Korea began lifting borrowing costs last year, months before the Fed, European Central Bank and the Bank of England. That hasn’t spared Korea’s currency. Seoul has also intervened but been very clear about its intent. “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 shifts, “the betting is on one side,” Rhee said. Why fight that?  

Perhaps traders should, for once, believe what Japan has been telling them. Finance ministry officials have been at pains to point out that they are not seeking to defend a specific line in the sand, but that intervention is aimed at the frenetic pace of yen moves, which make it difficult for businesses to calculate import and export costs and plan for the long term. 

Prime Minister Fumio Kishida has taken to talking up how to use the weak yen, rather than fight it, pledging support for 10,000 companies to take advantage of the currency. BOJ Governor Haruhiko Kuroda, generally blamed as the chief architect of the current weakness, for months has been telling anyone who’ll listen that he’s not going to raise rates — not now and seemingly not ever, with just months left to go in his term. 

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 yen level, there may truly be no good options to change things. Unlike steps to weaken the currency, something Japan could theoretically do indefinitely because it just has 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 has had little impact on the currency’s underlying direction.  

Secondly, Kuroda is right to stick to his guns: For Japan to lift rates to the level that would significantly close the gap with the US would be disastrous for the economy. If you thought ructions in the UK’s gilt market led to some unexpected chaos in recent weeks, imagine what would happen in the most indebted country in the world if money was no longer free. The cost of servicing Japan’s vast pile of debt would surge, increased fiscal and defense spending plans would go out the window, and households would be devastated by an increase in variable-rate loan repayments, which made up more than two-thirds of mortgages last year. 

Like in so many other things, Japan must simply navigate in waters that the US (in this case the Fed) is charting. The Fed is the only body that can change this narrative. In the meantime, Japan just has to get on and find the silver linings: reshoring 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 form. 

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor of Bloomberg News for economics.

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 Tokyo deputy bureau chief.


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