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Besides verbal intervention, there is little Japan can do to obstruct the rise of the yen. Photo: Reuters
Opinion
Neal Kimberley
Neal Kimberley

In a Trumpian world, Japan may have little choice but to accept a stronger yen

  • Japan’s Ministry of Finance is unlikely to act to prevent a rise in the yen at a time when US President Donald Trump is accusing other countries of currency manipulation and complaining about Tokyo’s unfair relationship with Washington
Neal Kimberley
Neal Kimberley
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Policymakers in Japan won’t welcome the prospect, but currency markets may be on the cusp of delivering a materially stronger Japanese yen. While such a move would only further complicate Japan’s efforts to kindle inflation, there’s precious little that Tokyo could do to obstruct the rise of the yen. 

Admittedly, Masatsugu Asakawa, who until last Friday was vice finance minister for international affairs at Japan’s Ministry of Finance, said last month that “if exchange rates are moving rapidly in a way that cannot be explained by economic fundamentals, Japan has no choice but to voice concern”.

But whether Asakawa’s successor as Japan’s top currency diplomat, Yoshiki Takeuchi, holds similar views remains to be seen. Either way, such rhetoric is hardly going to send chills down the spines of foreign-exchange traders. The currency markets will be acutely aware both of Japan’s lack of room for manoeuvre in this regard and of developments elsewhere that might encourage the yen’s value to move from its current level.

First, unlike on many previous occasions, the idea that Japan’s finance ministry could choose to intervene in the currency markets to stem yen appreciation it deems unacceptable is highly unlikely under current circumstances.

Already, US President Donald Trump has taken to Twitter to accuse China and Europe of playing a “big currency manipulation game”.
His Twitter account would probably go into meltdown if he were to see Japan intervening to stop the yen rising against the dollar, especially when the White House already thinks the US’ trade relationship with Japan is skewed towards Tokyo.

Donald Trump wants a weaker US dollar. Bad idea

“With Japan, we’re negotiating with them because they send us millions of cars and we send them wheat. Doesn’t work,” Trump said at last month’s G20 meeting in Osaka.
Tensions between the US and Japan aren’t just restricted to trade. Trump also has reservations about the US-Japan defence agreement. “We have a treaty with Japan. If Japan is attacked, we will fight world war three,” Trump told Fox Business on June 26. “But if we're attacked, Japan doesn't have to help us at all. They can watch it on a Sony television.”

So, in reality, apart from verbal intervention, the ministry’s hands would appear to be tied at present.

As for the Bank of Japan, although it could dial up its ultra-accommodative monetary policy and try to make the yen a less attractive purchase for currency market participants, it would have to contend with the fact that both the European Central Bank and the US Federal Reserve are also moving towards a looser monetary policy.

Will Japanese yen be a safe haven for investors?

“If we really want to live up to our mandate, further monetary stimulus is now needed until there is improvement in economic and inflation prospects,” ECB Governing Council member Olli Rehn told German newspaper Boersen-Zeitung last Thursday.

As for the Fed – and leaving aside the continuing pressure to cut interest rates from Trump, who last Friday tweeted that the “Federal Reserve doesn’t have a clue” about the economy – a more dovish tone has been adopted by rate-setters including central bank chief Jerome Powell himself.

Strong US nonfarm payrolls data for last month doesn’t mean a rate cut of 25 basis points can be ruled out this month.

The bottom line is surely that, as Japan’s largest bank MUFG wrote in its foreign exchange outlook for July, upward pressure on the yen is “likely to be reinforced by the fact that the BOJ’s scope for following the Fed’s and other central banks’ lead is very limited”.

Federal Reserve chairman Jerome Powell has adopted a dovish tone, and the US central bank may be moving towards a looser monetary policy. Photo: AP

In these troubled times, China must make the yuan a safe haven

In addition, the yen retains its safe-haven status. When all’s not right with the world, the currency markets tend to favour the Japanese currency. This becomes even more pertinent when investors are holding substantive short-yen, long-dollar positions – carry trades that are largely predicated on a continuing interest rate differential between Japan and the US that favours the greenback.

The prospect of Fed easing undermines the logic of these carry trades and, as a recent International Monetary Fund working paper notes, “Heightened uncertainty can lead to an appreciation in the yen through so-called ‘safe-haven effects’, which tend to be amplified by carry trade reversals as exchange rate uncertainty rises.”

Whether Tokyo likes it or not, the stars may be aligning for a rise in the yen.

Neal Kimberley is a commentator on macroeconomics and financial markets

This article appeared in the South China Morning Post print edition as: Japan will need to get ready for a strong yen, like it or not
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