It does not come as a surprise that the Japan Ministry of Finance (MoF) intervened to stem yen appreciation. Floods in Thailand have put paid to hopes of recovery in Japanese exporters. Supply chains are disrupted again. Honda is shutting its Thai plant for six months. Last week, the Bank of Japan (BoJ) downgraded growth and inflation outlook for the current financial year and next – 2011-12 (half way through) and 2012-13. With the US dollar weakening against the Euro and with China stalling on Yuan appreciation and with the Korean won weaker against the Japanese yen, the combination might have become a tad too intolerable for Japan.
We do not know if a weak yen is a cure-all for Japan’s problems. We do not even know if Japan has an economic problem – given the ageing and declining population – if one ignores its huge domestic debt, of course. There are limitations to what can be achieved by policy interventions in the face of inexorable demographic trends. However, based on conventional logic, Japan can reflate its economy through monetary stimulus more than other economies are justified in doing so. There is genuine deflation in the country. The BoJ is reluctant to do so. In the long-run, the BoJ Governor is right. In the short-run, he risks being left behind by the Bernankes and the Draghis of the world.
As long as that is the case and as long as the Federal Reserve and the European Central Bank can create more inflation than ageing Japan and a reluctant central bank, it will be difficult to achieve sustained yen weakness. That is not going to prevent the Ministry of Finance from trying, from time to time, as they have done today.
What the intervention signals to us is that it is impossible for all nations in the world to have a weak currency. Some will be able to achieve it – not that it counts as a success – and some will not. The pressure on them to do something about it would rise as those who are hurt by it – exporters – are more vocal than the rest. Something has to and will give.