We need to shatter one big myth about the weak yen
Intervention rarely turns any currency around on a sustainable basis
TIMOTHY Geithner, the former US Treasury Secretary who had extensive dealings with Japan over the course of his career, didn’t place much value in forecasting. He learnt as a young diplomat in Tokyo cranking out quarterly economic outlooks that even the best were little more than educated guesses.
The record of detecting turning points in the yen underscores the point Geithner – a man involved in major interventions to both support and deflate the currency – made in his memoir.
Today, with the yen weakening towards 160 per US dollar and traders speculating about when Japanese officials might wade in to stem the slide, it’s worth remembering how perilous strong declarations can be.
That’s especially true in the foreign exchange market, which has swollen to US$9.6 trillion a day.
Finance Minister Satsuki Katayama has stepped up warnings to yen bears. “The government will take appropriate action against disorderly FX moves, including those driven by speculation, as needed,” she told reporters last week.
Her team is deeply concerned about what it describes as one-sided and rapid shifts. These characterisations, however, are in the eye of the beholder. In reality, authorities can’t ignore absolute levels, particularly when they approach big round numbers.
Intervention rarely turns any currency around on a sustainable basis. So it’s important to ask how we got to this point, especially when false dawns have come and gone.
One thing is very clear: The idea, popular in early 2024, that the end of negative interest rates would be a new start for the yen, was flawed.
No question, the March 2024 increase in rates by the Bank of Japan (BOJ) was an occasion worth noting. But the idea that an enormous amount of money stored overseas would quickly return and herald a fresh era in global finance was wishful thinking.
For the yen to fundamentally alter its trajectory, the BOJ would need to truly undertake lift-off – and keep going, to considerably narrow the gap in borrowing costs with the US.
That hasn’t happened, with central bank governor Kazuo Ueda proceeding cautiously. He nudged his main rate up in two more small increments to 0.5 per cent, with the last increase in January.
Despite speculation about another hike, the bank keeps verbally retreating to the status quo. The BOJ sets policy independently of the Cabinet, though in practice, it’s wary of getting in the finance ministry’s crosshairs.
Even the rate differential argument has holes. Consider the example of South Korea, which raised rates early and often, but has seen the won weaken against the US dollar nonetheless.
As the market heads towards the last BOJ meeting of the year, prepare for a repeat. The bank may indeed hike as early as December. But given the hit from US tariffs seen in the contraction in real gross domestic product, any sustained hiking cycle is the stuff of fantasy.
After his premature hike in January, Ueda has proven to be more pragmatic. In August, he poured cold water on the idea that rate increases would ease Japan’s imported inflation problem, beyond tanking the economy.
The yen, meanwhile, remains far more susceptible to narratives than facts. That Prime Minister Sanae Takaichi’s extra Budget, which amounts to less than 3 per cent of GDP, should trigger the weakening seen in recent weeks makes little sense – particularly given the record tax revenue last fiscal year.
Takaichi has been known to advocate freer spending and has surrounded herself with fans of a “high-pressure” economy seeking to turn the page on decades of cost-cutting. It doesn’t mean, however, that she will have free rein, given her party lacks a majority in parliament.
Nonetheless, Takuji Aida, chief economist at Credit Agricole and a member of a panel advising the prime minister, said in a note that the administration will be more aggressive with currency intervention, while simultaneously being unlikely to seek a significant strengthening.
The administration sees the yen weakness as a “golden opportunity to increase domestic corporate investment”, he said.
During Geithner’s time in the Treasury, first as a senior official and then later as secretary, the US joined in a couple of rescues at Japan’s behest. The first was in 1998. The second was in the aftermath of the devastating 2011 tsunami, when the economy teetered on the brink of a slowdown and a strong yen threatened recovery from the disaster.
Geithner, then running the Treasury, was instrumental in organising Group of Seven support for Japan.
Forecasts shouldn’t be taken as gospel. If they end up being right, it may just be an accident. With luck, an inexpensive one. BLOOMBERG
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