Too much of a good thing
It seems the rapid devaluation of the Yen since last last year is beginning to worry even the insiders in the Japanese government. Considering the Abenomics initiative, the government ought to be applauding the fact the the Yen is weakening and thus increasing Japan’s competitiveness as well as serving to import inflation from the global economy, and thus ultimately stoking domestic demand (at least this is the idea…. theoretically).
And yet Economy Minister Akira Amari, has hinted that this might be a case of ‘too much of a good thing’. When asked on on a sunday TV show (19th of May, 2013) just how far the yen should weaken, he replied:
“It is being said that the correction of the strong yen is largely completed. If the yen keeps on weakening a lot more, it will have a negative impact on peoples’ lives.”
In addition, he seemed less than enthusiastic about the magnitude of the rise in the stock market:
“The stock market rise has been a bit faster than we’d expected.”
A few things can be taken away from these comments. Firstly, these statements indicate a burgeoning realisation within the cabinet that the monetary and currency aspects of Abenomics may not turn out to be as easily manageable as the government and the BoJ initially envisaged. Secondly, it is no accident that Mr Amari appears on a sunday TV show to make the remarks. They are obviously carefully designed to send a message to various recipients. NipponMarketBlog sees 3 separate purposes to the TV appearance:
1. The comments are meant to appease other countries (most notably China) who are unhappy about the fall in the Yen, even if the government is now privately quite content with the current level of the Yen.
2. The comments are designed to allay domestic fears that the cost of – well, everything – is about to jump. This goes for both consumers and corporates, especially manufacturing businesses that rely heavily on imports of materials. With Japan virtually completely dependent on imports of energy, the impact of the falling Yen is now making itself felt in domestic energy costs.
3. The last intended recipient could be the currency market participants. In other words, this is partly an attempt at micro managing the forex market and indeed the economy.
Whatever the reasons are (and it might very well be all of the above), the idea that the government can micro-manage the Yen is frankly extremely optimistic. In the past the authorities have intervened quite a lot in the forex market in order to weaken the yen, but the context now is entirely different from what it has been in the past. It may be that Prime Minister Abe can have some level of success in asking corporate Japan politely to increase wages (thus supporting the basic idea behind Abenomics), but NipponMarketBlog doubts very much whether international forex markets are likely to be as supportive.
For a chart showing the relative appreciation and depreciation of various currencies against the USD since 2008, see this piece: https://nipponmarketblog.wordpress.com/2013/05/06/currency-war-or-is-it/
The amount of assets currently on the move in and out of the equity market and the JGB market is very large and almost certainly impossible for any central bank to contain the impact of. The BoJ has effective declared war on its own currency, and so an attempt to intervene in the forex market in order to slow or halt the Yen’s depreciation would most likely result in precious little, except of course that it would end up costing ruinous amounts of Yen, which would then have to be ‘created’ i.e. printed, in the BoJ, which in turn would lead to even more weakening of the Yen. And so the vicious cycle would continue.
The chart below is a weekly chart of the USD/JPY since 2004:
The genie is well and truly out of the bottle now, and there is very little the Japanese government or the BoJ can do to get it back in. All the government can do now is hope the forex, equity and JGB market participants do not call its bluff.
As always, NipponMarketBlog is not predicting the imminent collapse of the currency or indeed the economy, but the tenuous nature of this unprecedented experiment is now clear for all to see, and it would appear that not even the instigators inside the Japanese government are entirely comfortable with the pace at which this is unfolding.
=== UPDATE 21st of May, 2013 ===
It seems it isn’t just the Japanese government that is becoming concerned about the pace and magnitude of the Yen’s depreciation during the past 8 months or so. In a survey conducted by Reuters, it turns out that corporate Japan is also uneasy about the Yen’s movements.
The survey found that roughly 50% of the companies prefer the Yen to stabilize around 100 Yen to the USD. Just 15% want a further Yen decline, and as much as 30% would like the Yen to strengthen back to 95 Yen to the USD.
What this demonstrates is that the ‘net currency equation’ for Japan is not as simple as the Japanese government would like to think, or indeed as simple as the equity market often seems to imply, i.e. falling Yen almost always results in a higher equity market. With Japan being so heavily dependent on imports of energy and materials for its manufacturing industry, the weakening of the Yen has resulted in higher costs for many companies, without necessarily also leading to higher revenues in their end product markets.
In addition, it stands to reason that regardless of the actual level of the Yen versus other currencies, excessive volatility is always undesirable for manufacturing companies, as it makes financial forecasting difficult, as well as making hedging operations related to both materials purchase orders and financial transactions to and from overseas subsidiaries much more complex and costly.
Please see this piece for additional musings on the effect of a weaker Yen as well as the government’s push for higher inflation in the Japanese economy: https://nipponmarketblog.wordpress.com/2013/04/19/the-hamburger-inflation-fallacy-cost-push-vs-demand-pull/