Thumbs Down On Yen Intervention

Why A Yen This Weak Is Negative For Japan

No joy for Japanese Finance Minister Shinichi Suzuki on getting foreign cooperation to stop the yen decline. In talks with reporters, Suzuki said that, at this week’s Washington meeting of the Group of 20 Finance Ministers, none of the other Ministers even responded when he talked about the yen’s decline. He also talked about the yen with US Treasury Secretary Janet Yellen, but he refused to say whether he discussed intervention in the currency markets. A Japanese TV network TBS cited an anonymous Finance Ministry (MOF) official saying that at the Suzuki-Yellen meeting, “The US side sounded as if it would consider the idea [of joint currency intervention] positively.” However, no other news outlet has issued a similar report and most private currency experts regard it as nearly unthinkable. The MOF could, of course, intervene unilaterally but without at least tacit Washington approval, it would be far less effective.

Moreover, the IMF implicitly put the kibosh on the notion of intervention because, as Sanjaya Panth, deputy director of the IMF's Asia and Pacific Department told Reuters, “What we're seeing so far on the yen is driven by fundamentals.” The G7 and G20 have agreed that intervention is only warranted when speculation drives a currency away from economic fundamentals. In this case, the fundamental is the growing gap between ultra-low interest rates in Japan and rising rates elsewhere.

A Cheap Yen Doesn’t Boost Exports Like It Used To

A currency rate that is too cheap hurts just as much as one that is too strong. At ¥128/$, the yen is hurting Japan.

For one thing, yen depreciation no longer boosts exports as much as in the past. One reason is that more companies are sending their production offshore. Two-thirds of Japanese autos are made overseas these days. A BOJ study shows that industries with more overseas production get less of an export boost for each 1% depreciation of the yen.

A second reason is that many Japanese makers of electronics and machinery are no longer as competitive as they used to be, no matter where they make their products. Despite a 40% surge in global electronics sales from 2008 to 2020, every one of the Japan’s top ten electronics hardware manufacturers saw its global sales slump. Japanese companies that used to be able to charge a premium price now have to scramble for sales by offering lower prices. But the size of the necessary price cuts has gotten bigger.

When the BOJ looked at 2,700 different products, it found that, whenever the yen got weaker during 2002-2010, 86% of the products enjoyed an export boost. In the next decade, 2011-19, only 72% did so. For the other 28%, yen depreciation actually hurt exports because it raised the cost of indispensable imports like energy and raw materials. Moreover, even for the companies that still benefited from yen depreciation the size of the export boost was a lot smaller than ten years earlier.

Paying More For Imports

The textbooks tell us that currency depreciation will lead consumers to switch from imported goods to buying the same products from domestic producers. However, about 40% of Japan’s imports are items like mineral fuels, food, and raw materials for which there are few, or no, domestic alternatives. The only result is that Japanese companies and households now have to pay higher prices to foreign producers.

What about the other 60% of imports? These are mostly manufactured goods, the majority of which are made by the overseas affiliates of Japan’s own companies.

As a result of these two factors, when the yen depreciates, Japan still buys more or less the same volume of imports; it just pays more for them.

Paying More To Get Less

Suppose you were a dressmaker bartering your products with the local grocery store. Suppose the grocer says he’ll now pay only half as much food for each dress because a new dressmaker can do a better job than you. You might take the deal on the grounds that getting half as much food is better than no food at all. However, you’re still worse off than you were.

A cheaper yen is like this. Japan is getting less food for each Toyota it exports. That’s good for Toyota, but not for Japan’s consumers. The benefits might still surpass the costs if that led Toyota to export more cars, hire more workers and pay the latter higher wages. But that’s not what’s happening in today’s Japan.

For details, see my piece in Toyo Keizai in Japanese at https://toyokeizai.net/articles/-/583924 and English at https://toyokeizai.net/articles/-/584119