Macroscope | What might a continued weak yen mean?
The US Treasury registered its continuing concern at ‘the persistence of the large trade imbalance between the US and Japan’ while the US President himself noted how his country ‘has suffered massive trade deficits at the hands of Japan for many, many years’
A flurry of recent decent economic data leaves Japan’s economy entering the New Year with a spring in its step.
Whether that sprightliness is maintained may partly depend on which direction the yen takes in 2018. A weak yen might suit Tokyo’s economic and monetary policy objectives but the risk is that Japan’s currency rises.
A weak yen enhances the competitive advantage of Japan’s export sector by making yen-denominated products cheaper for overseas buyers. It also exercises an inflationary influence on the prices of foreign goods imported into Japan, thus helping the Bank of Japan’s (BOJ) pursuit of higher inflation.
A stronger yen would have the opposite effects.
At first sight the idea of the yen materially strengthening this year might seem odd, given that the BOJ currently remains committed to ultra-accommodative monetary policies when other major central banks, such as the US’ Federal Reserve, are already moving to gradually normalise policy settings.
But if the yen weakness is predicated on the prolongation of BOJ ultra-accommodativeness, then the Japanese currency would surely react strongly to any hint that Japan’s central bank is rowing back from that stance or any perception by markets that robust Japanese economic data doesn’t require such loose monetary policy settings.