Bad Weak Yen. Be Careful What you Wish For

Ichiro Suzuki This spring, the Japanese yen keeps rewriting 20-year low against the U.S. dollar. This is on a nominal basis, and the currency has sunk into all time (post-WWII) lows in terms of real effective exchange rate (REER) that is inflation-adjusted against all hard currencies. Ten years ago, in the aftermath of the global financial crisis and the devastating earthquake and tsunami in the Northeastern region of the country, the Japanese economy was ailing amid a very strong currency that exacerbated deflationary pressure already persisting for some time. Corporate Japan was harshly critical of then Bank of Japan governor Yoshiaki Shirakawa who looked way too inactive for not reducing interest rates enough. Toward the end of Mr. Shirakawa’s term in March 2013, would-be candidates to replace him were all advocating aggressive monetary easing if he (there was no ‘she’) got a job. In retrospect, governor Shirakawa did a reasonably good job, by slashing Japan’s interest rates down to nothing at first and then injecting liquidity by expanding the BOJ’s balance sheet. As it turned out, however, Mr. Shirakawa’s reasonably aggressive actions were still insufficient to cope with the worst global financial crisis in 90 years. If that was not enough, downward pressure on the economy was exacerbated by shockwaves caused by the earthquake and tsunami. Looking back Mr. Shirakawa should have been more aggressive, but this is an afterthought. Fed chairman Ben Bernanke, who was critical of Mr. Shirakawa back then, would later find out how hard it was to lift the economy that was devastated by a banking crisis. The U.S. economy kept undershooting expectations in spite of very aggressive liquidity injections that would have been an overdose under the normal circumstances. Health of the U.S. economy was restored only after Mr. Bernanke left the Fed at the end of January 2014, replaced by Ms. Janet Yellen, who is Secretary of the Treasury today. The U.S. economy regained health ahead of Japan. Mr. Bernanke did a great job to cope with the aftermath of an unprecedented banking crisis. At the same time, body temperature of the U.S. economy has always been higher than Japan. That also made it possible for the U.S. to recover faster than Japan albeit after frustrating several years. Now, the yen is in a state of a free fall in response to rising U.S. Treasury notes’ yields. This is a wish granted for Japan, but be careful what you wish for. Along with the rest of the world, Japan is also feeling the pain of rising prices and usually patient Japanese people are beginning to raise voice on falling standard of living. BOJ governor Haruhiko Kuroda, who succeeded Mr. Shirakawa in 2013, vows to hold onto his ultra loose monetary policy since CPI officially runs only at 1%, a half the rate of his goal and is considerably lower than the numbers witnessed in the rest of the world. A weak yen caused by continuing ultra loose monetary policy could impose further pains to Japan due to the country’s high import dependence on commodities that include energy and food. Some economists call this a “bad weak yen” since it represents a declining fortune of the country. There is no arguing about a weak currency. It is not good since currency weakness reduces purchasing power for the country. It is common everywhere in the world that export-oriented manufacturers cry out on a sharp rise of their currency. However, those industries that complain already have a competitiveness problem with their inability to move up the ladder of products, raising the levels of value-addition. In the U.S., Detroit is a case in point. Automakers have always been big complainers who shouted against foreign competition (essentially from Germany and Japan) and called for a weak dollar. Though they still have an outsized political influence, combined equity market capitalization of General Motors and Ford today is only $120 billion and Chrysler is not even independently listed in the NYSE, as opposed to a trillion dollars for Tesla that doesn’t complain. Tech titans in Silicon Valley doesn’t cry, either, though it is in part due to their aggressive offshoring that Detroit politically is unable to do. Now on a weak yen, are they going to bring back textile factories because wage in Japan is now competitive enough for low value-added products? Though it might temporarily makes sense to bring back lost jobs on cheap enough wages, it is detrimental to the long-term fortune of the economy to give up on moving up the ladder of value chain. While manufacturers scream on a a sharp rise of a currency, there are a large number of companies and people who benefit from lower imported prices. The largest group of such beneficiaries are consumers who are totally silent. Through all those decades of the yen’s appreciation that lasted until the early 2010s, the Japanese economy was not transformed enough to take advantage of a strong currency. This is a bigger problem from a broader perspective than the pains felt today. The economy is paying the price for insufficient restructuring that had been called for, for decades.

About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.