Japan’s Currency Policy in Times of Uncertainty

The Japanese yen is among the world’s most traded currencies, and it accounts for 5.7% of global foreign exchange reserves. As the third largest share after the dollar and the euro, it’s garnered a reputation as being one of the world’s “safe-haven” of assets known for keeping its value during international crises or market turmoil.

This global status means institutional investors, retail day traders, and foreign governments all closely watch Tokyo’s official pronouncements regarding the yen. Typically, when financial markets are running smoothly, officials do not have much to say. But when events see panicked investors looking to buy yen, or foreign governments pressure the Japanese government on its broader currency policy, Japanese officialdom inevitably responds.

The government’s sensitivity to the yens movements is not immediately obvious. But an important component to the finance ministry’s currency policy is monitoring and influencing the value of the yen.

The yen is a free-floating currency and finance ministry officials are usually content to let markets determine its worth. But due to its safe haven status, the yen can rapidly appreciate during periods of uncertainty. When that happens officials give signs to market participants that they are watching the trend, and are prepared to intervene if necessary.

Due to its safe haven status, the yen can rapidly appreciate during periods of uncertainty

But why worry about a strong yen anyway? To some degree the textbook argument that a cheaper currency makes a country’s exports more competitive holds true. Many Japanese companies have offshored production, however, so this link is not as strong as it once was.

On the other hand, a weaker yen still benefits Japanese firms. A Nikkei analysis found that since 2000 a weaker yen has correlated with higher stock prices for major sectors of the Japanese economy like autos and electronics. With a cheaper yen these companies receive more bang for their buck, when repatriating profits from overseas operations.

The weaker yen brought on Bank of Japan’s monetary easing under Governor Kuroda Haruhiko also contributed to the profits of large Japanese companies through the most recent economic expansion.

Japanese consumers do not benefit as much from a strong yen as their overseas counterparts. A stronger yen makes imports more affordable, but there are fewer imports for Japanese shoppers to buy compared to other developed countries. In 2018 Japan’s imported goods and services were 18% of GDP, compared to an OECD average of 30%.

The government’s official currency policy complies with the G-20 communique in refraining from competitive devaluations. Beyond this it reserves the right to intervene in foreign exchange markets to address movements that officials believe to be speculative or do not reflect the underlying strength of the Japanese economy.

In practice, the government has not intervened since 2011 in the aftermath of the Tohoku earthquake and tsunami, and the following nuclear meltdown. Alternatively the finance ministry sends signals to currency traders through the financial press and news wires in a hierarchy of increasingly serious verbal warnings. As the Finance ministry grows more alarmed over FX movements, the tone of officials media statements transition from “We are watching currency movements closely,” to “Movements are rough,” eventually culminating in “We are seeing speculative moves that do not reflect economic fundamentals.” With each step the theoretical risk of an intervention grows larger.

Currency has been among the most nagging issues in Japan’s economic relationship with the U.S. The friction between them runs back through the 1985 Plaza Accord, and even today Japan remains on the U.S. Treasury’s currency manipulator monitoring list.

The issue comes up when trade is on the bilateral agenda. Japanese officials were active in ensuring that currency was not a part of the “phase one” trade deal the two countries signed in October 2019, and it has not attracted much attention since then. But if leaders want to craft a more robust agreement, the U.S. will almost certainly want to include currency provisions. That would put Washington squarely on a collision course with Tokyo, which has shown no willingness to budge on the issue.

Any discussions of currency policy would put Washington squarely on a collision course with Tokyo, which has shown no willingness to budge on the issue

U.S. frustrations with Japanese currency policy generally stems from lawmakers who represent districts and states which suffered job losses in industries competitive with Japan. Lawmakers from Ohio and Michigan, both of which lost jobs in the auto sector, have regularly call for stiffer currency measures against Japan.

Inversely, Japanese officials are frustrated at American lawmakers who seem to still be living in the 1980s. When it comes to U.S. policy, one Japanese official lamented that “every member of Congress thinks they’re America’s currency regulator”. They point out that the country’s current-account surplus, which lands it on the U.S. Treasury’s monitoring list, is due primarily to income from Japanese companies’ overseas investments and not a massive trade surplus. Therefore, any attempts made by U.S. negotiators for future agreements to go beyond the currency side letter agreed to by the original Trans-Pacific Partnership countries – a document that contains the same commitments as those of the G-20 communique – will meet stiff resistance from one of Japan’s most powerful bureaucratic institutions.

Japan’s currency policy is of course more than simply monitoring and influencing the value of the yen. Japan participates in currency swaps, particularly with other Asian countries, and finance ministry officials have been gradually making the yen easier to use internationally to help Japanese businesses operating abroad.

The yen’s movements are important to the prosperity of both large companies and the country’s nearly 800,000 retail FX traders. It is a responsibility they take seriously and guard cautiously. When deemed appropriate, nudging the direction of the yen in one direction or another remains one of the finance ministry’s most important roles.

Connor Cislo is a freelance writer and translator with credits in Bloomberg, Nikkei Asian Review, and the Asahi Shimbun's Asia & Japan Watch. He holds an MA in international relations from the George Washington University and a BA in diplomacy and foreign affairs from Miami University

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