The U.S. Treasury has rightly criticised Tokyo for trying to artificially weaken the yen. Currency intervention of the kind Japan wheeled out after March’s earthquake, and again in October, has a limited impact, and exporters have learned to live with a strong yen anyway. But fears that traders see the yen as a one-way bet mean more meddling is likely.
Japan’s $7 billion current account surplus places natural pressure upward on the yen. Authorities in Tokyo make little secret of their determination to fight against it. A stronger currency makes exports less competitive overseas and so the government periodically rattles its sabers, warning traders it will strike if the currency rises too rapidly. Occasionally the Bank of Japan makes good on the threat by selling yen for dollars.
The usual reason to weaken a currency is to protect exporters, who become less competitive when the currency strengthens. The yen has more than doubled against the dollar since 1985. But it’s not clear Japan’s exporters need such support. They have adjusted, cutting costs and moving production abroad. Profits in Japan’s electronics sector have thus recovered since the financial crisis to where they were six years ago, despite a yen 50 percent stronger, according to Goldman Sachs.
Tokyo may have other motives in intervening, such as to reduce volatility. A volatile yen is toxic to even the most adaptable exporters, crippling their ability to plan investments. There’s also the problem of being seen as a safe haven. The yen has risen roughly 42 percent since August 2008, largely because investors are fleeing the dollar and other currencies. That acts as an unwarranted tax on exporters, even if it isn’t yet driving them out of business.
So it makes sense for the Japanese officials to try to scare traders away from the yen when they can, if only to make sure the yen doesn’t become a one-way upward bet so volatile that Japan’s industrial investment comes under strain. While the yen may still be bound for further strengthening, 2012 will most probably see Tokyo keep brandishing its swords in a vain effort to coax it back down to earth, whether Washington approves or not.