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 . Japanese equities has plunged from the huge interest of buying the currency from different sources, for example the Chicago Mercantile Exchange shows substantial interest in the yen. The yen has appreciate more than 24% against all major – currencies . .
Abenomics — which included substantial monetary and fiscal expansion — has nothing to do with it.
Since Abenomics was introduced, Japan’s labor market has improved considerably: 1.5 million new jobs have been created, and the unemployment rate has fallen to just over 3%. 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 USD/JPY, continues to appreciate. 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 recognize this, in theory. On Aug.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 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. 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 . .
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. Though Japan may become a scapegoat for the failure of the TPP, it seems unlikely that the deal would be ratified in any case, given the current political climate in the United States. An alternative would be for the BOJ to purchase foreign securities.
J. Mason ♦