The fact that the yen’s weakness probably won’t even manifest itself when Joe Biden and Fumio Kishida meet this week speaks volumes about the chaotic state of the world.
In the past, everyone-for-himself politics in Tokyo was a pressing issue on the agenda. But considerations of China’s military strengthening, developments from Gaza to the Red Sea, and the specter of some other Trump presidency leave little geopolitical leeway. Exchange Rate Dynamics Area.
Still, it’s time for Biden’s Treasury Department to think more through the lens of the yen’s chronic misalignment with economic reality. This includes incentivizing China to interact in a race backwards with Tokyo.
Best friend, why doesn’t Chinese leader Xi Jinping think he’s absolutely right to increase his exports when Japan, America’s best friend, is doing it so blatantly?This would shake up the global monetary system as South Korea, Singapore, Indonesia and other Asian economies would also act to limit exchange rates.
Tokyo is pushing back against rumours that it is pursuing a policy of weak yen. After all, didn’t the Bank of Japan raise interest rates for the first time in 17 years?
Sure, however, there is an explanation for why the yen is weaker today than it was on March 18, the day before the Bank of Japan’s negative yield policy ends. It was mandatory to take the smallest step imaginable last month without raising the exchange rate between the yen and the dollar.
Finance Minister Shunichi Suzuki’s rather mocking and superficial comments about an imaginable intervention did not pass the laughing test either. In fact, let’s face it, after more than 25 years of a weak yen policy, Japan is finding it difficult to abandon this strategy.
This policy has more consequences than for Asia’s second-largest economy. The yen is down 7. 6% year-to-date. If a low exchange rate were a recipe for prosperity, Argentina and Indonesia would be members of the Group of Seven.
In Japan’s case, a quarter-century of weak yen policy has diminished the urgency of a revolving door for governments to do their jobs. Why aggravate special interests or do the heavy lifting to reduce bureaucracy, make hard-labor markets more flexible, catalyze a startup boom or empowerment when the central bank saves the day?
Available liquidity has allowed business leaders to innovate, restructure, and take risks. This has been the case since 2013, when the Bank of Japan stepped up its quantitative easing experiment. It’s arguably the largest corporate wellness program the world has ever seen.
The timing couldn’t be worse. As the Bank of Japan flooded Japan Inc. In a way that fostered complacency, China was widening its point of competitiveness.
Some say the reform procedure introduced by former Prime Minister Shinzo Abe a decade ago has put the economy in a better position to take on China. This is not the case.
Of course, Abe’s corporate governance efforts are helping to propel the Nikkei 225 index to all-time highs. But if “Japan is back,” as investors claim, the Bank of Japan would remove intravenous tubing. Not so.
All of this has financial strategists wondering if the yen will soon fall to 160 to the dollar. In a recent meeting with a senior Bank of Japan official, he quipped, “How do you understand our Japanese peso?”
Jokes aside, what’s genuine is how Xi’s China sees it. This is unlikely to be the case.
As China struggles to meet its 5% expansion target this year, its asset crisis deepens and deflationary pressures mount, Xi’s economy wants everything it can get. Nothing would boost gross domestic product faster than a weaker yuan boosting exports.
Of course, there are many threats. Manipulating exchange rates downwards can make it more difficult for property developers to pay their offshore debts, amplifying the threat of default. This could simply undo the progress made in building trust in the yuan. That would give Republicans and Democrats alike an explanation for why to go after China, and that would be in an election year.
Still, the yen’s fall would possibly make Xi think he still has no option to do the same. A Chinese move toward a weaker exchange rate would cause panic among officials from Washington to Tokyo. It would also put Biden’s Treasury chief, Janet Yellen, in jeopardy. A tricky position.
Could U. S. officials remain impassive when they criticize China for doing precisely what its best friend, Japan, is doing?How can Yellen’s team fight China’s financial shenanigans and expect Japan to do the same?
The answer, of course, is for the Kishida government to settle for a more potent yen. It’s not enough to say that Tokyo doesn’t need the yen to weaken further. He wants to take ambitious and transparent steps to breathe life into the exchange rate. There’s a good chance this signals confidence that can resonate with global investors.
Biden would do well to devote time to this factor when he meets with Kishida in Washington this week. The longer the scenario persists, the greater the threat that the Japanese peso will inspire Chinese actions that could disappoint global markets. You’re going to get more and more nervous as 2024 progresses.