Yen depreciation and currency wars

The issue of Yen depreciation as a direct result of the recently announced BoJ monetary stimulus program, is something that is receiving a surprisingly limited amount of attention.

The general media seems to largely ignore this, focusing instead on the (potential) benefits for Japan. But of course this issue is not a Japan specific issue. It affects most other countries in the world both in terms of direct impacts from the fall in the Yen (effectively a beggar-thy-neighbour effect) and resultant impact of competitiveness, and also in terms of the liquidity flows out of Japan and into other liquid assets such as US Treasury Bills and paper issued by other governments.

BoJ Governor Kuroda is quoted as saying: “Our policies are taken for domestic purposes and currencies are absolutely not our target.”, adding “It is unthinkable that we will change monetary policy just because currencies move in a certain way.” In other words, he publicly takes the position that the devaluation of the Yen that has happened for months now, and is likely to happen at an even more rapid pace going forward, is not an intended result. At first glance that appears highly disingenuous since there is an obvious benefit (at least theoretically) for the Japanese economy to having a weaker Yen, but it might actually be true. The real goal here a monetary shot in the arm to the Japanese economy on such a scale that it wakes up from its comatose state. However, it is fairly obvious that if the monetary expansion policy also leads to a weaker yen, then the BoJ won’t intervene to stop that. What a surprise.

Eventually one must expect some sort of reaction, most likely (and probably most loudly) from the Chinese government about the adverse impact this is having on their trade balance, and that could well temper the enthusiasm in the market for ‘playing the theme’ of Japanese reflation. Interestingly, both the IMF and the Fed have more or less overtly given their support for this policy. This is interesting because it tells us that global authorities are so desperate for growth that they are prepared to gamble with something as damaging for everyone as unilateral devaluation and potentially full blown currency wars. It is also a classic case of ignoring long term risks in the hope of enjoying short term benefits. This all sounds unpleasantly familiar when one considers the pseudo-solutions that have so far been presented in the Euro zone. These efforts of course also driven largely by the IMF.

As mentioned previously, there is no panacea for solving Japan’s problems, and it is certainly true that nothing the Japanese authorities can do will happen independently of the rest of the world. Japanese authorities may well at some point need to publicly stress their awareness of this aspect of the monetary easing and also their commitment to maintaining normal trade relations with other countries, especially large trading partners in Asia.

Here’s Bloomberg TV’s take on the outlook for the Yen.


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