Japan finds itself in a situation where it keeps making the economic news. Much of this is the result of the central planning it has employed over the years. I realise that for new readers this may be a bit of a shock, but the country that looks at times an example of the private-sector has employed many features of a command economy. Often the stress factor is the currency the Japanese Yen which of course they have had various goes at trying to control as well via both open mouth operations and actual foreign-exchange intervention.
The Japanese Yen
This morning it has fallen more than a big figure to 156 versus the US Dollar and for my home country the UK Pound £ has rallied to 210. This comes a day after this from the Nikkei news agency.
TOKYO — The yen’s overall strength hit a 53-year low last month against major currencies, falling to a third of its 1995 peak, as Japan’s prolonged economic weakness takes a toll on the currency’s purchasing power.
The Japanese currency’s real effective exchange rate as of January was 67.73, the lowest level since the country’s transition to a floating exchange rate in 1973, according to figures released by the Bank for International Settlements as of Friday.
As you can see they are reflecting on the Bretton Woods era and the loss of purchasing power of the Japanese Yen in that time. They do not mention it but that means that the many Japanese investments abroad have in this sense been a success in terms of a currency trade or swap. The actual investments are often poor but the currency has been a winner. Returning to the article they give a historical perspective.
The yen’s real effective exchange rate peaked in April 1995 at 193.95 and has since fallen to roughly a third of that level. The yen has weakened against a wide range of currencies, including currencies in developed economies like the U.S. dollar and euro, as well as the Chinese yuan and Thai baht.
It is interesting that the Thai baht a relatively minor currency gets a mention perhaps because of the way some Japanese manufacturers relocated there. They do not really get to the command economy point but do get to a cause of the problems.
One major factor is the prolonged slump in the Japanese economy, known as the “lost decades,” following the collapse of the bubble economy.
Where this Nikkei piece is different is that the Japanese media ( and remember it owns the Financial Times) follows face culture and thus avoids outright criticism of Japan Inc. But there is an implied critique below.
Japan’s potential growth rate, which was around 1% in 1995, was stuck in the low-0% range in the late 2010s, according to the Bank of Japan. The weak growth potential led to extremely low inflation and interest rates, resulting in a prolonged decline in the real effective exchange rate.
You may note that they have copied the Bank of Japan and diverted to potential rather than actual economic growth. Whereas we over the years have been following the reality of weak actual economic growth which combined with falls in real wages is the cause of the problem.
Interest-Rates
These are another present feature of a problem created by the command economy structure. The last quote from the Nikkei piece tries to shift the blame but the reality was that the Japanese government appointed Bank of Japan Governor Kuroda to keep interest-rates and bond yields around 0% for ZIRP and in fact negative with an official interest-rate of -0.1% for some years. They also bought hundreds of trillions of Japanese Government Bonds. So I can only quote Dawn Penn and say “No, No, No” to the quote below.
With both prices and wages rising recently, the BOJ is working to normalize monetary policy. The bank has indicated plans to continue raising the policy interest rate above the current 0.75%.
The reality is that the Bank of Japan has done the absolute minimum that it thinks it can get away with. That is shown by the inflation rate which has come as quite a shock in a country used to very little of it.
Japan’s headline inflation rate fell to 1.5% in January, its lowest level since March 2022.
The reading ended a run of 45 straight months in which inflation had remained above the Bank of Japan’s 2% target. (CNBC)
That was from last Thursday and there is an irony as it was not so long ago that a 1.5% inflation rate would be considered awful in Japan whereas now it is something of a relief. But the kicker is in the second sentence where nearly 4 years of inflation problems saw the interest-rate rise by a measly 0.85%. The reality as I pointed out back on the 2nd of October 2023 was fears over its own balance sheet.
That has in itself backfired as one of the main financial news stories over the past year or so has been the rise in Japanese Government Bond yields. By trying to avoid depth-charging its own balance sheet the Bank of Japan went to ramming speed instead. The recent decline in world wide bond yields has helped in a tactical sense with the ten-year yield declining to 2.1%. But the strategic move has been a surge which if it has moments of reflection must have the Bank of Japan holding its head in its hands. It could and should have raised interest-rates more.
That brings us neatly to this morning’s news.
local media reported that Japanese Prime Minister Sanae Takaichi voiced apprehension over more rate hikes in a meeting with Bank of Japan Governor Kazuo Ueda last week………Takaichi took a “tougher stance” than in their previous meeting in November, the Mainichi newspaper reported, citing unidentified people. (Bloomberg)
So an organisation which does not really want to raise interest-rates is being told not too! This is a sort of dance Japanese style. On the 6th of February last year I wrote this about a speech from Tamura san of the Bank of Japan.
Firstly we have clear Forward Guidance for an interest-rate of 1%. Secondly we see that in spite of the fact that Japan has not had a 1% interest-rate for years and indeed decades we see a central banker confident of his neutral interest-rate theory. It must be a long way down from that particular Ivory Tower.
A year later that 1% interest-rate remains a promise rather than a reality. So as Luther put it.
I told my girl bye-bye (Bye)
But I really didn’t mean it
Said I met somebody new so fine (Fine)
But I really didn’t mean it
China
When things are awkward you tend to find that as Shakespeare put it your troubles come in “battalions”.
BREAKING: The Chinese government imposed export controls on 40 Japanese companies and other institutions with immediate effect, escalating trade tensions between the two neighboring countries. (Nikkei)
Comment
Much of what I have looked at today has revolved around the Bank of Japan and how it became The Tokyo Whale owning much of the bond market and 7% or so of the equity one. This attempt at central control has ended up with the the pressure being felt by the Japanese Yen and interest-rates. This has led to bond yields spiraling and inflation being in Japanese terms out of control for some time.
“Alice asked the Cheshire Cat, who was sitting in a tree, “What road do I take?”
The cat asked, “Where do you want to go?”
“I don’t know,” Alice answered.
“Then,” said the cat, “it really doesn’t matter, does it?” ( Lewis Carroll)