Will the Yen Need Saving Again Soon?
The effects of a recent government action already are fading.
By The Editorial Board
Dado Ruvic/ReutersIt was obvious when Tokyo and Washington intervened recently to stabilize the value of the yen that the intervention wouldn’t stick, and sure enough.
The Japanese currency has commenced a new downward march, so perhaps it’s time for a new plan.
That joint intervention, in which the Bank of Japan (BOJ) and U.S. Treasury bought yen worth tens of billions of dollars, arrested a slide that had seen the yen fall to about ¥164 per dollar, a 40-year low.
In the immediate aftermath, the yen rose to about ¥156.
As of Monday it has dropped toward ¥160.
The big monetary guns appear to be deterring currency speculators.
But absent fundamental policy changes in Japan, no intervention from anyone will prop up the yen indefinitely.
There’s some evidence Tokyo is getting the message.
One error that almost certainly contributed to last month’s yen drop was the Japanese central bank’s decision in late July to hold short-term rates steady.
The Bank of Japan’s policy rate is negative in inflation-adjusted terms, and the persistent gap between low Japanese and higher foreign interest rates helps explain the sinking yen.
A summary of the discussion from that July BOJ meeting hints at rate increases to come, “faster than market expectations.”
So far the BOJ has waited months between each rate increase since abandoning its negative policy rate in March 2024.
If BOJ Governor Kazuo Ueda and his colleagues can stick to a faster timetable for returning interest rates to a normal level, they’ll do their part to stabilize the yen.
Tokyo’s commitment to reintroducing normal economic policies may be only partial, however.
Politicians appear to be growing more worried about the consequences of higher rates for funding the government debt, which stands at about 230% of GDP.
Prime Minister Sanae Takaichi in May asked Mr. Ueda to step up the BOJ’s purchases of government bonds to tamp down longer-term yields, according to Japanese media reports after last week’s currency intervention.
You can appreciate her concern, given that this spring she pushed through a record ¥122.3 trillion budget and keeps proposing new supplements such as energy subsidies.
This is what happens when decades of abnormal monetary policy, including prolonged negative rates, coincide with reckless government spending.
Ms. Takaichi eventually might even have to formulate an economic plan that doesn’t hinge on “stimulus” spending.
The central question remains whether Japan will become an economy where reforms have unleashed more animal spirits and spurred investment.
If it doesn’t, don’t assume the sporadic foreign-exchange interventions will keep working.
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