Strong yen is not Japan’s main problem
You wouldn’t know it to hear officials talk, but the strong yen is not Japan’s main problem. The Bank of Japan’s latest moves on Monday didn’t weaken the currency — though that is one broad objective of fiscal and monetary stimulus. In any case, the trade-weighted yen is weaker than its real 1990-2010 average and Japanese exports are still rising. Export lobbies may have the government’s ear, but intervention could make Japan’s domestic predicament worse.
When the Democratic Party of Japan took office last year, its leaders talked about putting more emphasis on Japan’s domestic economy rather than the needs of major exporters, which had been favored by Liberal Democratic Party administrations since 1955. The DPJ’s first finance minister, Hirohisa Fujii, said at his introductory press conference last September that he was opposed in principle to currency intervention because it could distort the economy.
Fujii was, however, forced out after less than four months, and some officials have reverted to blaming the rising yen for Japan’s problems. Direct currency intervention, though not yet tried by the DPJ, looks more likely than ever, too. Yet the yen’s trade-weighted exchange rate, corrected for differences in inflation, remains about 6 percent below the average of the last 20 years. True, the yen did last week hit a 15-year peak of less than 84 against the dollar and remains far stronger than its 20-year average of around 100. But the comparison with the trade-weighted figure underlines the extent to which that reflects the dollar’s overall weakness.
Meanwhile, exports are hardly suffering badly from the strengthening yen. In July, they were up 2 percent on the month and 23.5 percent from the previous year. Japan also continues to run a large current account surplus.
Even deflation shouldn’t be the Japanese government’s biggest worry. Consumer prices have, in fact, fluctuated within a 5 percentage point range since 1992. Rather, the number one challenge is excessive government spending, which has brought continuing fiscal deficits and government debt amounting to more than 200 percent of GDP.
By skating over this and majoring on the yen — particularly against the dollar — Japanese policymakers risk retaliatory currency interventions. Those beggar-my-neighbor battles worsened global economic conditions in the 1930s and would do so again now.