“Bear territory” was the theme for global markets on Monday, and don’t forget to include the Japanese yen on a list of the biggest losers. The currency opened the week falling to 135 yen to the dollar, a low last seen in 1998. And watch below, as there are no obvious brakes on its descent.
We are old enough to remember a time two months ago when the breakout of 125 yen against the dollar was seen as cause for concern. Bank of Japan Governor Haruhiko Kuroda, a monetary dove even by Tokyo standards, had warned that now was the time when yen weakness could start hurting the economy rather than helping it.
Yet Mr. Kuroda has done nothing since to defend this putative floor, and neither has anyone else. He admitted on Monday that the yen’s rapid fall was ‘undesirable’, but the central bank is sticking to its negative interest rates and a 0.25% yield cap on 10-year government bonds. . Inflation is now 2.5%, which is high by Japanese standards. Higher import prices caused by the weakness of the yen, especially for energy, is a major reason for this.
Investors watching the government of Mr. Kuroda and Prime Minister Fumio Kishida seem to have concluded that there is no limit to the fall of the yen, so it is falling. Tokyo gives free rein to the normal market tendency to lower the yen as US interest rates rise.
Perhaps Mr. Kuroda’s reluctance to act stems from his fear of nipping inflation in the bud after central bankers have spent the past two decades trying to fend off the specter of deflation. He will also be aware that with public debt now above 250% of GDP, raising interest rates to fight inflation could place unprecedented pressure on Tokyo’s budget.
Still, it’s hard to see what Japan gets for this new bout of low yen inflation other than rising tensions. Price increases are significant for basic necessities (12.2% for fresh food and 21% for electricity) and hit low-income households the hardest. Real wages fell 1.2% in April.
The silver lining is that a weak yen could trigger new investment in Japan, and specifically a new wave of foreign mergers and acquisitions. This view was expressed by Nomura chief executive Kentaro Okuda in an interview with the Financial Times on Monday. He speculated that those investors might be encouraged by some recent successes of foreign activists trying to shake up big companies like Toshiba..
Foreign capital would bring with it new and better management in target firms as well as greater pressure on other managers to improve or become targets themselves.
Economists inside and outside the Japanese government have argued for years that higher inflation would boost the economy, but today that is proving wrong in real time. Japan’s economic challenge has been to spur productivity growth by reforming bureaucratically strangled and chronically mismanaged businesses. If a weak yen accidentally helps Tokyo get there, well, any port in the middle of a storm.
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