Strong dollar crisis: what we can learn from Japan’s ‘weak’ yen

Rather than burning reserves to defend their currencies, countries should be conserving resources, given the looming debt and financial system crises

Better to let their currencies depreciate and suffer short-term pain now, to avoid worse later

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Shoppers in Tokyo, Japan, on September 16. The Japanese currency could have a good deal further to fall before it bottoms out. Photo: Bloomberg

Anthony Rowley

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs.

Published: 11:15am, 30 Oct 2022

Japan commentators have become obsessed, almost to the point of hysteria, with the “weak” yen, as though it represented an affront to national dignity as much as it is a perceived threat to the world’s third-largest economy – when the problem is more one of a strong dollar.

Many countries in Asia and beyond are suffering severe collateral damage from the surge in the dollar as the United States battles a self-inflicted inflation problem by hoisting interest rates. Others have responded by raising rates to boost their national currencies and avoid importing inflation.

They are burning through national dollar reserves by buying their own currencies just when they might need those reserves to cope with looming debt and financial system crises. Japan, in contrast, is behaving like a Biblical “wise virgin” in letting the yen slide.

This is not the common narrative, especially among analysts who see the Bank of Japan and Ministry of Finance as being irresponsible by stubbornly refusing to raise interest rates and fall in line with US-dictated monetary policy. But Japan has good reason to avoid doing so.

Memories are still fresh of how a US-led group of countries launched a yen-strengthening and deflationary attack on the Japanese economy in 1985 through the so-called Plaza Accord.

That agreement (signed at New York’s Plaza Hotel) was one of a series of “Japan bashing” actions by the US in the 1980s. It was somewhat less crude than the ritual sledgehammering of imported Japanese cars by US auto workers but its impact proved to be more lasting and profound.