Ichiro Suzuki
The Japanese yen remains under pressure. In the morning of April 29th in the U.S., the yen touched 160 to the dollar, and then pulled back for fear of a market intervention by Japan’s Ministry of Finance. Then, the MOF really did it. Though unilateral interventions didn’t have much effect, as everyone knows, the actions still reminded ‘speculators’ of a risk of making one way bet. The JPY has been on a steady downward trend since a year ago, after interventions in October 2022 brought the Japanese currency back to 127 up from 152 to the USD for a 16% gain. After the actions, the JPY got back on to a renewed trend of descent. To this second round of interventions, the market displayed only muted responses, not surprisingly.
For the MOF, an operation of selling the yen and buying the dollar is simple, since the Bank of Japan is able to print as much yen as the MOF wants to sell to stem the rise of the currency. Selling the dollar, however, is entirely different. The MOF can sell all the dollar it has but that’s as far as they can go. Even if Japan is the largest holder of U.S. Treasury securities, the MOF’s resources for FX market interventions have their limits. In the absence of sustained inflows of capital into yen assets, the market easily sees how many more large scale interventions they are capable of doing with their resources at hand. This allows speculators to keep attacking the currency until it really breaks.
Emerging market currencies are often victimized by one way bets by the market, or by speculators who try to achieve what they believe as correct value through massive actions. In early May, a dollar buys 877 Argentina pesos (and twice that amount in the black market.) Until late 2001, the peso traded at par with the greenback based on the Convertibility Plan. The currency board, however, was forced to be abandoned in the face of depletion of U.S. dollar reserves that allowed Argentina to peg its currency to the dollar. Since the Convertibility Plan was successfully broken, the peso has suffered precipitous falls with occasional bear market rallies, to where it is today, with no end in sight. Without dollar assets to sell, the only option left to Argentina to stem the peso’s fall was raising interest rates. Then, rate hikes are devastating to the economy. This is a vicious circle that emerging economies often find themselves caught in. While the yen’s relentless fall is beginning to have some resemblance to the plight of emerging market currencies, Japan hasn’t fallen to that point, at least not yet.
An ordeal of non-stop falls is not unique only to emerging market currencies. The British pound, once the world’s reserve currency, had suffered a plight of near straight line falls for almost a century, all the way down to near parity against the U.S. dollar, until the floor was finally confirmed by the 1985 Plaza Accord. The fall of the British economy was attributed to lost competitiveness of the industries that led the Industrial Revolution, to the United States, Germany and later Japan that moved up the ladder of economic development. Acute deprivation during WWII and loss of colonies in the aftermath of the war brought down the United Kingdom in terms not only of the economy but also of its international standing. The U.K. faced a series of balance of payment crises, into which the IMF had to intervene. The British disease became so rampant and corrosive that it became a near household phrase outside the country.
The pound received a much hoped for turnaround by internationally coordinated currency interventions in September 1985. While the Plaza Accord had immense effects in influencing the direction of the dollar against all other hard currencies, the British economy’s fundamentals were slowly improving to justify buying of the pound. Prime Minister Margaret Thatcher embarked on a supply side reform, which would reshape the economy, enhance competitiveness, promoting London to as the world’s financial hub. It was as much ‘Thatcherism’ as the Plaza Accord that turned around the pound.
The yen keeps falling. That the Japanese currency is undervalued doesn’t stop its descent. Fundamentals surrounding the Japanese economy offer little reasons to buy the yen proactively. The U.K. under Mrs. Thatcher might offer some hint to Japan. Amid heightened trade frictions dating back to the 1980s, it was already considered imperative for Japan as the second largest economy to shift the engine of growth to domestic demand, which is private sector consumption, rather than continued reliance on exports. (China doesn’t share this thought today, with its attempt to drive mercantilism further to lift its ailing economy.) Back then, former Keidanren (Japan Business Bureau) chairman Toshio Doko drew a far-reaching plan to restructure the Japanese economy, to make it geared toward domestic demand-driven growth. A plan was drawn, and then it was up to politicians to make it happen, as Mrs. Thatcher did it for the British economy.
Forty years later, the Doko Plan is yet to be implemented in earnest. Yes, there have been piecemeal reforms over the decades, including privatization of government assets, restructuring of government agencies and market-driven overhauling of the private sector, etc. These efforts, however, still looked half-hearted at a time when the rest of the world kept changing faster, with radical restructuring of the economy, in order to fit themselves to the age of globalization and information technology. Japanese politicians are far too timid to embark on full-fledged supply side reforms in the face of adverse effects that come with it. Reforms create many losers as well as winners. Japanese voters in general resist changes more strongly than elsewhere, (Hence, market forces at times would have to enforce disruptive changes on reluctant voters.)
Radical restructuring unleashes new growth opportunities in the economy. Higher growth rates raises body temperature of the economy and accommodate higher interest rates. Then, at last, the yen can be bought on interest rates. Can anyone deliver this?
About the author: Mr. Suzuki is a retired investment banker based in Tokyo, Japan.
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