© The Financial Times Ltd 2014 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
September 15, 2010 9:00 pm
It may have been a victory lap of sorts. One day after the ruling Democratic Party of Japan leadership contest was resolved in prime minister Naoto Kan’s favour, the Japanese government intervened in the currency market to weaken the yen. While the move is a welcome escape from Tokyo’s policy paralysis, its significance is more political than economic.
Instructing the Bank of Japan to sell off yen will have flattered supporters of Ichiro Ozawa, Mr Kan’s defeated challenger, who argued strongly for intervention in the leadership contest. More importantly for the DPJ, it may bolster the party’s popularity, which has withered after its election landslide a year ago. The steady rise of the yen against the dollar – which broke through a 15-year high of Y83 to the dollar on Tuesday – has unsettled exporters.
Company owners seem to think knocking down the yen – by three per cent during the course of Wednesday – will help them: they sent Japanese stock prices up by 2.4 per cent. But any succour will surely be short-lived.
Foreign exchange interventions are more likely to stick if deployed in co-ordination with other countries and when they target speculative bets rather than fundamental market forces. As long as the Japanese allow chronically lower inflation than their trading partners, they must get used to irrepressible upward pressure on their nominal exchange rate. As fattening trade surpluses and historical comparisons show, the real exchange rate is hardly overvalued.
Nor should Tokyo expect a sympathetic hearing in foreign capitals. Countries praying that trade will compensate for sickly domestic demand will not take kindly to Japan’s export-snatching manoeuvres. In Washington, where the China-bashing season has now opened with congressional hearings on Beijing’s currency peg, the Japanese move will sour the mood further. Determined optimists may at least hope Tokyo will have steeled determination to deal with global imbalances at the G20 summit in Seoul.
The greatest benefit intervention could bring would be if it signalled that the Bank of Japan was more willing to fight deflation. Though the central bank does the finance ministry’s bidding in the currency market, it resists pressure for domestic monetary policy to be more forceful. Prolonged non-sterilised intervention would bring much-needed inflationary pressure – presumably not the goal. But if it is the only way to reinflate Japan, we should take what we can get.
Copyright The Financial Times Limited 2014. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.