The Amazing Drowning Yen – The Wall Street Journal

Bank of Japan Governor Haruhiko Kuroda delivers a speech at a hotel in Tokyo on June 6.


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Kyodones / Zuma Press

The “bear zone” was the main topic in global markets on Monday, and don’t forget to include the Japanese Yen among the top losers. The currency opened the week down to 135 yen to the dollar, the lowest level last seen in 1998. And see below, there are no obvious hurdles as it slides.

We are old enough to remember a time – two months ago – when the yen’s breakout of 125 against the dollar was a concern. Bank of Japan Governor Haruhiko Kuroda, a monetary pigeon even by Tokyo standards, warned that this is the point where a weak yen could start hurting the economy rather than helping it.

However, Master Kuroda has done nothing since then to defend this supposed ground, and neither has anyone else. He admitted on Monday that a rapid decline in the yen is “undesirable”, but the central bank is sticking to negative interest rates and a maximum yield of 0.25% on 10-year government bonds. Inflation is now 2.5%, which is high by Japanese standards. Higher import prices caused by the weak yen, especially for energy, is the main reason.

Investors watching Mr. Kuroda and Prime Minister Fumio Kishida’s government seem to have concluded that there is no limit to the yen’s decline, so the matter is going down. Tokyo is unleashing the normal market trend of lowering the yen as US interest rates rise.

Kuroda’s reluctance to act may have stemmed from his fear of nipping inflation in the bud after central bankers have spent the past two decades trying to stave off deflation. He also recognizes that with government debt now exceeding 250% of GDP, higher interest rates to stave off inflation could put unprecedented pressure on Tokyo’s budget.

However, it is difficult to see what Japan will get for this new wave of weak yen inflation other than the rising tension. Price increases are sharp for household necessities – 12.2% for fresh food and 21% for electricity – and hurt lower-income families the most. Real wages fell 1.2% in April.

The glimmer of hope is that the weak yen may lead to new investment in Japan, and specifically a new wave of foreign mergers and acquisitions. This view was expressed by Kentaro Okuda, CEO of Nomura, on Monday in an interview with the Financial Times. He speculated that these investors might be encouraged by some of the recent successes of foreign activists trying to destabilize big companies like Toshiba..

Foreign capital will bring with it new and better management in the target firms as well as greater pressure on other managers to improve or become targets themselves.

Economists inside and outside the Japanese government have argued for years that more inflation would boost the economy, but today it is proving wrong in real time. Japan’s economic challenge has been to stimulate productivity growth by reforming firms that have been stifled by red tape and chronic mismanagement. If a weak yen accidentally helps Tokyo make this happen, well, any port is in a storm.

Journal editorial report: Paul Gigot interviews former Trump White House chief economist Kevin Hassett. Images: Zuma Press/Bloomberg/Getty Images Composite: Mark Kelly

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