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Mar 31st 2004
From The Economist Global Agenda
The yen is surging again. Will the Japanese authorities halt its rise? Can they?
THIS intervention is stupid,” said Fumihiko Igarashi, an opposition politician in Japan’s lower house of parliament. “It’s a fight we can’t win.” Indeed, on the day he spoke, Wednesday March 31st, the Japanese monetary authorities ceded one round in their fight with the currency traders. They watched the yen strengthen past ¥105 to the dollar, having intervened furiously in the markets only last month to keep it from crossing that threshold. The defeat became a rout as the yen pushed on to reach a four-year high, at ¥103.4 to the dollar. Traders and analysts are now anticipating the day when the yen is worth a full cent.
Did the finance ministry, which sets Japan’s yen policy, go down fighting, its interventions overwhelmed by the sheer weight of market sentiment? Or had it already thrown in the towel and given up intervening altogether? In the whole of March, the authorities sold a massive ¥4.7 trillion ($45.2 billion) in their attempt to keep the currency down. But analysts reckon most of that ammunition was fired in the first part of the month. For the past couple of weeks, the ministry has been denying rumours that it has given up on its efforts to keep the yen down. It insists there has been no change in policy. On Wednesday, currency traders obviously concluded that the ministry doth protest too much.
Japan’s GDP grew at an annualised rate of 6.4% last quarter and its trade surplus ballooned by more than 50% in February, compared with a year earlier. It is easy to conclude, therefore, that Japan’s strengthening economy warrants a stronger yen. But for Japan, a cheap yen is not just a way to conquer foreign markets; it is also a way to conquer deflation—and with the GDP deflator, a broad measure of price changes, still falling by 4.4%, that battle has yet to be won.
Inflation is often described as the result of too much money chasing too few goods. Japan’s deflationary dilemma is the converse of this: not enough money, chasing too many goods. The Bank of Japan is doing its best to fix the first part of this problem, flooding the banking system with reserves. But as Andrew Smithers, an independent financial analyst, points out, this policy is doomed to failure, because one never really knows how much money is enough. The right amount will vary as the economy grows, and as the demand for money fluctuates. This is precisely the reason why most central banks target the price of money, in the form of short-term interest rates, rather than its quantity.
Japan cannot do this, of course: its short-term interest rates, at zero, are already as low as they can go. But as an alternative, Mr Smithers points out, it can still target the exchange rate—the foreign price of money. The finance ministry sold ¥20 trillion last year trying to keep the exchange rate steady. But, Mr Smithers argues, this did not go far enough. In an ideal world, the ministry would go on selling until the currency was thoroughly debauched and the economy decisively reflated.
However, the Americans, at the other end of the yen-dollar exchange rate, do not necessarily see things this way. “No one has devalued their way to prosperity,” asserted John Snow, America’s treasury secretary, earlier this month—ignoring the prominent example of President Franklin Roosevelt, who devalued his way out of America’s own deflationary trap in the 1930s. Alan Greenspan, the chairman of the Federal Reserve, echoed Mr Snow’s criticism: he recently said that the pace of Japan’s currency intervention was “unsustainable”. The scale of the dollar reserves that Japan has built up as a result of its intervention was “awesome”, he said.
Awesome these dollar purchases undoubtedly are, but shocking also is the supply of dollar assets coming to market. America’s federal government alone will need to issue over $500 billion-worth of Treasuries this fiscal year to cover the gaping hole in its budget. At the moment, foreign central banks are the star bidders every time these bonds are put up for auction. But if the Bank of Japan takes a back seat in future, other buyers will have to be tempted into the market by means of higher interest rates. The United States Treasury, in other words, will have to make its debt more attractive to hold and thus more costly to service. Japan may not be the only loser in the currency-intervention game.
From The Economist Global Agenda
The yen is surging again. Will the Japanese authorities halt its rise? Can they?
THIS intervention is stupid,” said Fumihiko Igarashi, an opposition politician in Japan’s lower house of parliament. “It’s a fight we can’t win.” Indeed, on the day he spoke, Wednesday March 31st, the Japanese monetary authorities ceded one round in their fight with the currency traders. They watched the yen strengthen past ¥105 to the dollar, having intervened furiously in the markets only last month to keep it from crossing that threshold. The defeat became a rout as the yen pushed on to reach a four-year high, at ¥103.4 to the dollar. Traders and analysts are now anticipating the day when the yen is worth a full cent.
Did the finance ministry, which sets Japan’s yen policy, go down fighting, its interventions overwhelmed by the sheer weight of market sentiment? Or had it already thrown in the towel and given up intervening altogether? In the whole of March, the authorities sold a massive ¥4.7 trillion ($45.2 billion) in their attempt to keep the currency down. But analysts reckon most of that ammunition was fired in the first part of the month. For the past couple of weeks, the ministry has been denying rumours that it has given up on its efforts to keep the yen down. It insists there has been no change in policy. On Wednesday, currency traders obviously concluded that the ministry doth protest too much.
Japan’s GDP grew at an annualised rate of 6.4% last quarter and its trade surplus ballooned by more than 50% in February, compared with a year earlier. It is easy to conclude, therefore, that Japan’s strengthening economy warrants a stronger yen. But for Japan, a cheap yen is not just a way to conquer foreign markets; it is also a way to conquer deflation—and with the GDP deflator, a broad measure of price changes, still falling by 4.4%, that battle has yet to be won.
Inflation is often described as the result of too much money chasing too few goods. Japan’s deflationary dilemma is the converse of this: not enough money, chasing too many goods. The Bank of Japan is doing its best to fix the first part of this problem, flooding the banking system with reserves. But as Andrew Smithers, an independent financial analyst, points out, this policy is doomed to failure, because one never really knows how much money is enough. The right amount will vary as the economy grows, and as the demand for money fluctuates. This is precisely the reason why most central banks target the price of money, in the form of short-term interest rates, rather than its quantity.
Japan cannot do this, of course: its short-term interest rates, at zero, are already as low as they can go. But as an alternative, Mr Smithers points out, it can still target the exchange rate—the foreign price of money. The finance ministry sold ¥20 trillion last year trying to keep the exchange rate steady. But, Mr Smithers argues, this did not go far enough. In an ideal world, the ministry would go on selling until the currency was thoroughly debauched and the economy decisively reflated.
However, the Americans, at the other end of the yen-dollar exchange rate, do not necessarily see things this way. “No one has devalued their way to prosperity,” asserted John Snow, America’s treasury secretary, earlier this month—ignoring the prominent example of President Franklin Roosevelt, who devalued his way out of America’s own deflationary trap in the 1930s. Alan Greenspan, the chairman of the Federal Reserve, echoed Mr Snow’s criticism: he recently said that the pace of Japan’s currency intervention was “unsustainable”. The scale of the dollar reserves that Japan has built up as a result of its intervention was “awesome”, he said.
Awesome these dollar purchases undoubtedly are, but shocking also is the supply of dollar assets coming to market. America’s federal government alone will need to issue over $500 billion-worth of Treasuries this fiscal year to cover the gaping hole in its budget. At the moment, foreign central banks are the star bidders every time these bonds are put up for auction. But if the Bank of Japan takes a back seat in future, other buyers will have to be tempted into the market by means of higher interest rates. The United States Treasury, in other words, will have to make its debt more attractive to hold and thus more costly to service. Japan may not be the only loser in the currency-intervention game.
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