Analysis | Tokyo’s Warning Was All Bark, No Bite. Get Used to a Weak Yen

Some of Japan’s most senior politicians cranked the volume on the dial marked “verbal intervention” to max. Traders barely noticed. 

Both Finance Minister Shunichi Suzuki and top government spokesman Hirokazu Matsuno threatened “action” Wednesday if the yen’s weak trend continued — code for currency intervention. Whether traders noticed or cared, however, was impossible to tell from watching the currency: It renewed fresh 24-year lows against the dollar, going right up against 145 to the greenback. 

It’s a far cry from the days when the trading world would hang on every word from Japanese officials, parsing the nuance of carefully judged statements and watching the motions of officials in the 1990s such as “Mr. Yen” Eisuke Sakakibara, the Finance Ministry’s top currency official. His successor was Haruhiko Kuroda — now governor of the Bank of Japan and, if not the architect of the current situation, then at least helping out with the blueprints. 

Despite his mouthful of a title, the current vice minister of finance for international affairs, Masato Kanda, has little to say about the yen’s moves and holds a far lower profile. But this week’s actions show that verbal intervention just isn’t the force it used to be. Japan has been out of the yen game so long that traders might no longer know how to parse the clear step-up statements officials gave Wednesday. After all, a generation has passed since traders last saw Japan try to strengthen the currency. 

It’s more likely, though, that the market sees Japan’s hands are tied. Unlike its many past attempts to weaken the yen, Tokyo has limited foreign currency ammunition. With seemingly no US backing for a coordinated intervention and little public pressure to fix the situation, it looks likely that Prime Minister Fumio Kishida will adopt his standard cautious approach and wait for things to correct themselves, just as the yen did this summer. 

Of course, Japan could choose to fire a warning shot. Intervention is often seen as a losing battle, destined to fail — but it all depends on the goal. If the idea is to produce a sustained change in behavior, good luck. Robert Rubin, who as US Treasury secretary presided over rare joint action in June 1998 to prop up the yen, was skeptical that market maneuvers by governments could set the long-term trajectory of a currency. “Ultimately, currencies follow fundamentals,” Rubin said at the time.

But if the plan is to inject two-way risk into trading, cushion a currency’s drop or stem an advance, then authorities can sometimes eke out a tactical victory. The issue that plagued the yen back in the 1990s was a banking crisis. Things are different now; the biggest single driver of the slide is the canyon between interest rates in the US and Japan. That’s only likely to widen if, as seems likely, Kuroda sticks to his guns of maintaining an easy monetary stance.

What other options does Japan then have? Every dollar surge comes with wistful allusions to the Plaza Accord, the 1985 agreement that engineered a steep drop in the dollar, as well as a rally in the yen and the West German mark. But Plaza was primarily a political document: Then-US Treasury boss James Baker, one of the most powerful people to ever occupy that office, was trying to contain protectionist sentiment in Congress. 

America’s role as guarantor of the West’s security meant Baker could easily get his way. China’s economy was tiny, and the Soviet bloc had little by way of capital markets. With interest rates on their way down in the US and Japan enjoying a growth spurt but butting heads with Washington on trade, both fundamentals and politics seemed to align. A Plaza equivalent now would have to involve an almost hopelessly large coalition of nations whose interests won’t match. 

Should Kishida then exert pressure on the Bank of Japan to act, and reduce the interest-rate differential? That path is simple to envisage but harder to carry out: The economy couldn’t withstand the hit of even a small rate hike, while in the US, the Fed looks determined to keep raising and choke out inflation. A minor tweak to policy would likely only encourage those betting on change. In any case, would such a move impact either the currency or Japan’s mild inflation? Kuroda is among those who don’t think so. 

Perhaps the solution for Japan is, just most of us have done with Covid, to learn to live with things. The weak yen presents challenges, yes — but at least now isn’t an explosive political issue akin to the cost of living crisis in the UK. Ties between the Unification Church and some in the ruling Liberal Democratic Party, brought to light after the killing of former Prime Minister Shinzo Abe, dominate the headlines in Japan, not pain at the checkout. 

The weak yen also presents opportunities. Kishida has already identified one, even if he’s yet to fully act on it: There’s no better time to reinstate Japan as a major tourism destination. No country in the world has as many people lining up at the borders to come in and drop cash. Japan should reinstate visa waivers suspended due to the pandemic,  properly open up, and profit. 

The prime minister could take it one step further too, and expand tax benefits to both domestic and overseas firms to base their manufacturing in Japan, where labor is now both skilled and cost-effective The country might have to accept that in this era, both talk and the yen are cheap. 

More From Bloomberg Opinion:

• The BOJ Doubles Down on a Weakening Yen: Moss & Reidy

• Bank of Japan Should Stop Meddling in Markets: Richard Cookson

• The Yen Won’t Be Moved by 1990s Nostalgia: Reidy and Moss

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Gearoid Reidy is a Bloomberg Opinion columnist covering Japan and the Koreas. He previously led the breaking news team in North Asia, and was the Tokyo deputy bureau chief.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor of Bloomberg News for economics.

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