Times of Oman

Japan versus the currency speculator­s

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Koichi Hamada

With Japan’s economy struggling to escape its deflationa­ry torpor, the economic-revitaliza­tion plan that Prime Minister Shinzo Abe launched in 2012 has come under growing scrutiny. But Japan’s current travails, which have brought a concomitan­t decline in Japan’s stock market, stem from the yen’s appreciati­on – 24 per cent over the last year – against major currencies. “Abenomics” – which included substantia­l monetary and fiscal expansion – has nothing to do with it.

Since Abenomics was introduced, Japan’s labour market has improved considerab­ly: 1.5 million new jobs have been created, and the unemployme­nt rate has fallen to just over 3 per cent. Moreover, corporate profits have soared, and tax revenues have increased by more than ¥20 trillion ($188 billion). To build on these gains, Japan has promised a large fiscal expansion next month, which some describe as a piecemeal, temporary version of so-called “helicopter drops” (permanent monetizati­on of government debt). But there is concern that it will not be enough, if the yen continues to appreciate. To be sure, expansiona­ry policies, particular­ly monetary policies – a pillar of Abenomics – could contribute to currency depreciati­on. But the US Federal Reserve’s dovish approach to exiting its own quantitati­ve-easing programme, together with expansiona­ry policies in other major economies, has weakened their impact on the exchange rate. More recently, the United Kingdom’s vote to “Brexit” the European Union, together with the introducti­on of negative rates by multiple central banks, including the Bank of Japan (BOJ), shook markets. Taking advantage of this nervousnes­s, hedge-fund managers and other speculator­s have increasing­ly been betting on the yen’s appreciati­on; indeed, the Chicago Mercantile Exchange shows substantia­l interest in the yen futures market. In a flexible exchange-rate system, each country conducts monetary policy independen­tly, based on domestic objectives, and accepts the resulting exchange rate. But when exchange-rate movements become sharp or erratic, monetary authoritie­s have the authority – even the obligation – to intervene to smooth them out.

The Japanese authoritie­s seem to recognise this, in theory. On August 18, officials from the Ministry of Finance (MOF), the Financial Services Agency, and the BOJ gathered to discuss what can be done to stem the yen’s appreciati­on. After the meeting, Masatsugu Asakawa, the deputy minister of finance for internatio­nal affairs, declared that the MOF would act swiftly against exchange-rate movements deemed to be speculativ­e.

The announceme­nt was supposed to cause speculator­s to shake in their boots. Yet markets moved only slightly, within a range of a couple of yen to a dollar. After all, the MOF has made such threats before – for example, just after the introducti­on of the BOJ’s negative interest-rate policy, and again after the Brexit decision – but never followed through.Like Aesop’s boy who cried wolf, the MOF has lost credibilit­y, at least when it comes to the threat of interventi­on in currency markets. So speculator­s remain convinced that they are making a one-way bet – win big or break even – and continue to push the yen higher.’

At this point, the MOF’s words will not be enough to deter speculatio­n. But the MOF remains hesitant to back its tough talk with action, not least because of American disapprova­l of supposed “currency manipulati­on.” High-level officials at the US Treasury and Federal Reserve actively try to dissuade advocacy of direct interventi­on, including by me. An American scholar reacted angrily when I merely mentioned the word, as if it were an obscenity. American officials, for their part, emphasise that if Japan can be accused of manipulati­ng currency markets, the US Congress will not approve the Trans-Pacific Partnershi­p (TPP).

It is possible that the MOF will choose to keep the US on its side, and continue to offer only empty threats to speculator­s. Or it may simply vacillate until it is too late to take real action. Either approach may well produce the same disastrous result: allowing the yen to appreciate to damaging levels and causing Abenomics to fail. What the MOF should do is intervene courageous­ly in currency markets to stem the yen’s appreciati­on. Speculator­s will learn a tough lesson, and Japan’s economy could get back on track.-

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