Plus Ca Change in Japan?
Last week was a good lesson in terms of what might, or what might not, happen when policy makers attempt to steer currency markets. Notwithstanding the obvious question of much how clout policy makers de-facto holds with respect to moving currency markets (not a lot I think), the outgoing finance minister in Japan Hirohisa Fujii has on several occasions made it clear that he, for one, is not worried about a stronger Yen only to revert slightly as markets responded with a; "well then, lets go ..." In general however, it does seem as if Fujii's general position has been that a strong Yen perhaps would not be so bad since it would only serve to boost purchasing power. This is of course true, but it also highlights a rather alarming disconnect between the fundamentals of the Japanese economy stuck in export depedency and deflation and policy makers economic analysis (or spin) of the situation.
Now, Fujii has stepped down due to health reasons and perhaps in an attempt to enter the office with a bang instead of a whimper, his replacement Naoto Kan kicked off his first public appearance by noting that he, for one, would like the Yen to be a little bit weaker and that he believed the MOF and the BOJ should cooperate to make it so. Having not forgot the last time in 2002 that Japan intervened by selling Yen, markets reacted swiftly by giving the Yen a nice jolt downwards (against the USD).
Japan’s Finance Minister Naoto Kan said markets should set currencies, while underscoring the ability to intervene in extreme circumstances and taking account of the yen’s impact on the economy. “Currencies of course should be determined by markets, but I must be aware that I have the right and the responsibility to take action in emergency situations,” Kan told reporters in Tokyo on his second day in office. “I must take into consideration businesses’ expectations.”
It appears then that Mr. Kan has received comment from above as the statement noted above was followed by comments by prime minister Yukio Hatoyama and finance minister delegates that members of governmetn should not really comment much, if at all, on currency markets.
So, will this be the last we hear from Kan on the Yen. Not very likely in my opinion. Japan needs a weaker Yen and slowly Japanese policy makers will wake up to this. In this sense we are likely to see policy makers and delegates tip-toeing in and out on this refrain as the data comes in. Whether this means that we will see actual intervention is another question. I have called for intervention once to many times before. However, I can say with the strongest possible conviction that prime minister Hatoyama's growth target for Japan in the 2010-2020 stint of 2% annually is dubious at the offset and completely bogus if Japan is not able to maintain a stable and growing external surplus towards the rest of the world. In a post-crisis context where many economies look set to follow the same road of export reliance this would definitely need a weakening Yen.
In his annual 10 non-predictions Macro Man revealed the non-intervention by part of the MOF/BOJ as number 8. I have no reason to disagree with him, so for now; plus ca change indeed!