2024/04/24 Nikkei English News Article by William Pesek
When the yen's continued decline made headlines, global investors had to wonder if anyone in Tokyo's power hall was at home. The same is true for Japanese households, who have to deal with the international media coverage of the Japanese market and their own financial woes.
Workers, who watched the Tokyo stock market hit a 34-year high and wage negotiations between unions and major employers each spring saw their biggest rise since 1991, wondered if they were missing out on inflation as it continued to outpace most pay raises.
These dynamics actually have a lot in common.
The news of the yen's weakness came by and became part of the zeitgeist in Tokyo. In television, newspapers and in the windows of bank branches, it is impossible not to notice the decline of the country's currency. In addition, the large influx of foreign tourists into the streets and shops of Japan's major cities is also a big credit for "cheap Japan".
However, when will a weak yen undermine confidence that Japan's economy is truly recovering?
Arguably, Japan has reached this inflection point, with policymakers tacitly acquiescing that the yen has fallen 9.7% so far this year. The BOJ is almost universally expected to do nothing at its two-day board meeting starting on Thursday.
Also, note the silence of the Ministry of Finance, which is technically the decider of monetary intervention.
Of course, Treasury Minister Shunichi Suzuki has strongly hinted that Tokyo is "watching market movements with a high sense of urgency." The same is true of the Bank of Japan's pace of normalizing interest rates.
Tokyo officials can claim that they want the yen to be stable. Their failure to act when the dollar soared was an indulgence in the yen's decline suggests that they may not even act if the yen falls to 160 points against the dollar.
The negative impact on confidence cannot be underestimated. Since the fall of the yen is in the spotlight, how is it possible not to affect households' perception of the health of the economy?
Global investors who have injected capital into Nikkei Average see Japan as a comeback this year. However, even the most bullish investors will notice the disconnect between the idea that the economy is developing and the fact that the Bank of Japan is still stuck in 1999. It was in 1999 that the Bank of Japan introduced zero interest rates for the first time.
If, as the Global Fund hopes, Japanese companies are ready for economic prosperity, then why is Prime Minister Fumio Kishida's Liberal Democratic Party (LDP) sticking to an Argentina-like monetary strategy?
Why didn't Suzuki and Bank of Japan Governor Kazuo Ueda come to the podium and declare that a stronger yen is in Japan's best interests?
No one wants to see the yen suddenly soar by 20%, but Tokyo drawing a line in the sand, say, 150 yen per dollar, would give confidence that Asia's second-largest economy is emerging from the shadow of recovery. It may also allow Tokyo to avoid intervening in the foreign exchange market, which the Tokyo authorities have never attempted since October 2022.
The government and the Bank of Japan should form a united front to combat the long-term weakness of the yen. Japanese politicians should also encourage the central bank to remove quantitative easing (QE). The Bank of Japan has long remained near zero, in part due to fears of a major political backlash.
Ending QE would be an important step in restoring normalcy to the economy and motivating lawmakers and business leaders. The Bank of Japan's quantitative easing strategy, pioneered in 2001, is the equivalent of a defibrillator that doctors use to restore the heartbeat of failing patients. It was never intended to be a semi-permanent feature of the G7 economy.
After 24 years, the Bank of Japan is still delaying its decision to end quantitative easing completely. This reminds us that even if Japan's economy grows by 2 percent, this increase in output will be fueled by the world's most aggressive monetary easing program and taxpayers' acceptance of the largest public debt burden in the developed world.
This strategy is counterproductive. The Bank of Japan has been in "cash machine" mode for a quarter of a century, which has diminished Tokyo's sense of urgency in terms of cutting bureaucracy, modernizing the labor market, supporting start-ups and empowering women. Business leaders feel little pressure to restructure, innovate, and sprint.
A weak yen has hampered progress in reviving the animal spirits that once amazed the globe. Despite the Warren Buffett of the financial world rediscovering Japanese stocks, and despite news reports that Japanese households would receive huge salary increases, it never seemed to materialize.
It's time for Tokyo officials to try something different. First of all, they should admit that they are responsible for the unpopularity of the yen, and then set a more reasonable exchange rate.
The Bank of Japan's delay in normalizing the exchange rate, the Ministry of Finance's pretending that the yen problem is someone else's responsibility, and the Kishida team acting as if economic reforms will solve it on its own do not give people confidence. However, the depreciation of the yen does not give confidence.
This week, BOJ officials have the opportunity to break the status quo and try new approaches. At the same time, they want to send a signal that Tokyo's policymakers are back to work.