December 9, 2014


The Yen Is Falling! (William Pesek, 12/09/14, Bloomberg View)

How low might the yen go? Opposition lawmaker Takeshi Fujimaki, a former banker, may be off-base when he warns the currency could eventually hit 200 per dollar. But with growth faltering and Prime Minister Shinzo Abe doing far more talking than restructuring, Japan is depending on a weaker exchange rate to boost export earnings. A rate nearer to 150 is hardly out of the question.

There's a view in Tokyo -- and a certain tolerance in Washington for it -- that if a weaker yen helps Japan whip deflation, then the end justifies the means. But this reasoning suffers from two big flaws. First, while the yen's plunge has filled the coffers of large exporters and boosted tourism receipts, overall it's doing more harm than good by making imports much more expensive. Windfall corporate profits are lifting the onus off Japan Inc. to innovate and Abe to deregulate the economy.

The second problem involves the economic and geopolitical fallout of the yen's swoon. Just as the Federal Reserve needs to think carefully about how raising U.S. interest rates will affect developing nations, Japan must consider the damage caused by a continuing freefall. It's no coincidence that China's yuan plunged the most in six years yesterday, spurring fears of a new currency war in Asia.

"The Bank of Japan's effort to weaken the yen is a beggar-thy-neighbor approach that is inducing policy reactions throughout Asia and around the world," Nouriel Roubini warned in a recent op-ed. "Central banks in China, South Korea, Taiwan, Singapore, and Thailand, fearful of losing competitiveness relative to Japan, are easing their own monetary policies, or will soon ease more."

Posted by at December 9, 2014 7:02 PM

blog comments powered by Disqus