After threatening to intervene for weeks, Japan’s economic policymakers finally jumped into the currency markets to depress the value of the surging yen. The intervention was Tokyo’s first in six years, and had an immediate impact, softening the yen from under 83 to the dollar to around 85 by the afternoon. The Japanese have been freaking out over the strengthening yen, which hit another 15-year high this week against the dollar, fearing that it makes Japanese exports more expensive and less competitive on world markets, thus undermining Japan’s already feeble recovery from the Great Recession. Finance Minister Yoshihiko Noda, explained the government’s decision while confirming the intervention to reporters:
Deflation is continuing, and we are in severe economic conditions. Under those circumstances, recent movements [in the yen] will have adverse effects on the stability of economic and financial conditions, and we can’t overlook them.
However, in my opinion, Tokyo’s decision is bad, bad, bad – for Japan, and just about everyone else.
First of all, as I’ve argued before, a strong yen isn’t necessarily a terrible thing for Japan. The economy is simply much more dependent on exports for growth than it should be. The problem is that the domestic economy doesn’t provide enough growth. It’s too encased in regulation to create enough jobs and opportunities for entrepreneurship and investment. But Japanese politicians haven’t been willing to implement the drastic reforms necessary to unleash domestic demand. A weak yen, therefore, becomes a kind of policy crutch, one that allows the economy to produce a bit of growth while allowing its befuddled politicians to avoid tough decisions on economic reform.
A stronger yen would effectively force their hand. Imports would become cheaper, increasing the spending power of Japanese consumers and heightening the usually meager level of competition in the domestic market, which would spur on Japanese companies to become more efficient. A strong yen would also push Japanese export-oriented companies to become leaner and meaner. Such steps would help the long-term health and competitiveness of the Japanese economy much more than a weak yen. But these ideas are simply not on the policy menu in Tokyo.
The bigger problem with Wednesday’s yen intervention, however, is the signal it sends to the world. That message is: We want to export to you, not vice versa, for the good of our own recovery, not yours. One of the potential problems emerging from the Great Recession is that everybody wants to export their way to recovery, the U.S. included. The Europeans weren’t so broken up by the euro’s swoon earlier this year as it gave their exports a price edge over America’s. China gets routinely criticized for controlling the value of the yuan to ensure its exports remain competitive in world markets. Now we have Japan stepping up and saying they’ll intervene in markets to make sure their exports stay competitive as well.
Will other countries take Japan’s lead, creating a dangerous round of competitive currency devaluations? Maybe not. But as long as policymakers around the world expect other consumers to drive their recoveries at home, the risk will remain that the global economy could sink into an era of beggar-thy-neighbor policies that end up hurting everyone.
The fact is that not every country can export its way out of the Great Recession. Not every economy can run trade surpluses. Not every currency can be falling in value. And with the global recovery slowing, not every policymaker can count on external demand to revive growth back home. So pinning your nation’s hopes to exports alone is not a sound recovery strategy. Countries like Japan — and China and Germany, which run big surpluses — need to take the reform steps that are crucial to balancing their economies. That will ensure their robust growth in the future. There’s no reason why Japan’s trading partners should suffer because its political leaders are unwilling to reform.
What’s sad is that Japan has taken this step with very likely no long-term positive impact. The intervention was likely generated by Japan’s domestic politics. Prime Minister Naoto Kan needed to show his determination to salvage Japan’s rebound by acting on the yen after he won a hotly contested battle for his party’s presidency on Tuesday. The scale of yen trading is so huge that there is no way the Japanese government can alter the value of the yen on its own for any significant period of time.
That’s even more reason for Kan to reform the Japanese economy now, rather than continue to rely on a cheap yen to keep his people employed. Unfortunately for the world economy, there’s little sign of that happening.