MThe Japanese Ministry of Finance bought an estimated 20 billion dollars in yen a week ago in order to stop the depreciation of the Japanese currency by a good 20 percent against the dollar since the beginning of the year. it was for Japan a record amount and the first intervention to support the yen in 24 years.
Whether the action made a strong impression on forex traders is questionable. The currency is already slightly below the 145 mark again yen traded per dollar, which is sort of a red line for the government. Should the Bank of Japan continue its ultra-loose monetary policy while America, Europe and others raise interest rates against inflation, the red line will not last long.
Japan’s lone intervention underscores that the days of international exchange rate agreements are over. The US Department of Treasury expressed its understanding for the Japanese market intervention in reserved words, but did not take part. The strong dollar, which is appreciating not only against the yen but also against the euro, pound and other currencies as American monetary policy is tightened, is definitely in the interests of the United States. Dollar strength reduces external inflationary pressures.
Lots of expensive subsidies
In Japan, on the other hand, opinion is divided as to whether the weak yen will still benefit the country. The Bank of Japan and Gov. Haruhiko Kuroda say yes because they see the 3 percent inflation rate as only a temporary mirage and because the weak yen, reflecting loose monetary policy, is increasing domestic price pressures. Kuroda does not want to shake his expansive course in his last few months as central banker. The Ministry of Finance, which ordered the intervention in the foreign exchange market, has its doubts.
As Japan’s big companies increasingly serve foreign markets from abroad rather than from Japan, the impact of the weak yen as a lubricant for exports has been greatly diminished. The main consequences of the weak yen are higher import prices and the associated loss of purchasing power for citizens.
The government is trying to counteract this with expensive subsidies and price caps, for example for petrol or wheat. But a situation in which fiscal policy is forced to correct the damaging effects of stubbornly expansionary monetary policy is neither ideal nor stable.
The salutary pressures of free foreign exchange markets
Intervention in the foreign exchange market is also such a correction. The Treasury responded to an acceleration in devaluation triggered by Kuroda. He had forecast no change in monetary policy for the coming years. A few days later, Kuroda retracted the comment. It wasn’t meant that way. That smells like the beginning of openness to a course correction.
It is an instructive example in the discussion of whether the global turnaround in interest rates against inflation requires the coordination of monetary and economic policies. Some believe such a vote is necessary to avoid exchange rate turbulence with the Federal Reserve’s brisk rate hikes. Calls for coordination will intensify as the Fed tightens its pace to contain inflation. But the example of Japan shows how healing the pressure of free and uncoordinated foreign exchange markets can be.
The Fed and the European Central Bank had already succumbed to the illusion that inflation would pass in the past few years. The Bank of Japan is in danger of falling into the same trap. At 3 percent, inflation seems low because many prices are regulated. But the price pressure is also spreading in Japan’s economy and can still cause nasty surprises. The pressure from the yen depreciation is therefore welcome, as it reminds the Bank of Japan of the need for a monetary policy turnaround.
An international coordination of monetary and exchange rate policy could suppress such desired signals against political mismanagement. Japan can sing a song about that too. The bubble in stocks and assets that burst in 1990 and led the country into a severe and prolonged economic crisis was not least the result of the attempt by the major economies to coordinate exchange rates and monetary policy in the Plaza Agreement to ostensibly benefit them. In view of the foreseeable turbulence of the coming months, this fatal political failure should already be remembered.