Prime Minister Yoshihide Suga has a strong commitment to exchange rates. I think so from the memory when I heard his speech when he was Chief Cabinet Secretary. Prime Minister Suga showed the exchange rate numbers without even holding a memo. He was honestly surprised that he often remembers even the smallest numbers. He felt that this was possible because he had a strong interest in memory, although he had the ability to do so.
It seems that Prime Minister Suga is telling “Kasumigaseki bureaucrats” that “Please do not break below 100 yen.” He is talking, hoping that the dollar/yen rate will not rise below 100 yen.
The appreciation of the yen has a negative impact on the profits of exporting companies, and in the past, the appreciation of the yen and the depreciation of stocks often hit as a set. The current trend of yen appreciation is also a big psychological shock if it falls below 100 yen, and it is wary that the economy will cool down.
According to the author’s calculations, the dollar/yen rate trend has been rising at an average monthly pace of 70 yen since May 2020 of the Corona disaster. If this goes on, it is expected to fall below 100 yen in April-May 2021.
No, it may happen during the year-end and New Year holidays when the exchange rate is easy to move. Then, will the Japanese government finally embark on foreign exchange intervention, which is the treasure sword of the legendary family?
This could be a problem that should not be overlooked by US President-elect Joe Biden after taking office. After the presidential inauguration ceremony on January 20, 2009, Prime Minister Suga is also refraining from visiting the United States. Given that, foreign exchange intervention may be too frictional to make a decision, even if you want to.
There is also the problem that even if foreign exchange intervention is performed, the flow of yen appreciation cannot be reversed. The appreciation of the yen caused by the corona wreck is not caused by speculative factors, but by the depreciation of the dollar behind the appreciation of the yen.
No matter how aggressively the Japanese government buys the dollar through foreign exchange intervention, the dollar’s depreciation will not stop.
Conditions for reversing the weak dollar
If the dollar’s depreciation trend reverses, consider what could be a factor. One is the future of US monetary easing. At the Federal Open Market Committee (FOMC) in December, the Federal Reserve (FRB) decided to continue quantitative easing for longer than months. “Until significant progress is made towards the goals of maximizing employment and price stability,” he said.
The Fed’s balance sheet will continue to expand and the dollar’s funding will increase. The depreciation of the dollar will proceed against the backdrop of the expansion of the money supply. In order for the dollar to reverse, it will be necessary to improve as employment and price statistics jump significantly. This is difficult to see through.
Another factor is US finances. The current US economy is not good due to the infection with the new coronavirus. US retail sales were negative month-on-month in October and November in a row. Even if consumption declines, uncertainties about the future are unlikely to occur because there is a strong sense of expectation for fiscal stimulus.
In the near future, there are additional economic measures of $ 900 billion. After President Biden takes office, a $ 2 trillion fiscal stimulus will be concretely launched in four years. The United States will raise funds for a huge fiscal stimulus by increasing the issuance of US Treasuries.
Moreover, the funds will be covered by the inflow of funds from overseas. This increase in dollar debt is a factor in the depreciation of the dollar. The dollar will continue to depreciate unless the US economy’s growth scheme changes depending on fiscal stimulus.
Under what circumstances will the US economy be expected to grow without the “training wheels” of fiscal stimulus? The author analyzes that when the Biden administration starts and the sanctions tariffs imposed by the United States and China are reduced at once, it will be a positive economic stimulus and will greatly improve the growth outlook of the US economy.
However, President Biden has indicated that he will not immediately reduce sanctions tariffs so far. He would be afraid to be seen as “weak” by critical Republicans if he took a favorable approach to China. In that respect as well, looking at the United States, which cannot be helped to expand exports, it is likely that there will be many expectations that the dollar will continue to weaken in the market for some time.
Strategic policy toward the United States necessary for Japan:
Prime Minister Yoshihide Suga wants to stop the yen’s appreciation below 100 yen, but in the end, he will abandon foreign exchange intervention and accept the risk of yen appreciation. This is because we want to prevent the relationship with the United States from breaking down due to foreign exchange intervention alone. The United States does not currently have Japan as a currency manipulator. Even so, since it is a monitored country, it may be seen as a country of caution that may move to foreign exchange intervention.
Instead of putting up with the risk of a strong yen, Prime Minister Suga wants the United States to return to a free-trading country. The United States has become an obsolete country that limits free trade over President Trump’s four-year trade deficit. If the United States grows through fiscal stimulus, the trade deficit will surely increase. Exports from Japan to the United States will also increase accordingly. Even if the yen is strong, Japan has the benefit of increasing exports to the United States, which is a plus when considered in total.
In order not to eliminate such merits, the Biden administration must not be dragged by the idea that the trade deficit is a problem in the Trump era. Japan’s role is to bring the United States back into membership in free trade partnerships such as the Trans-Pacific Partnership (TPP). I would like to ask the Government of Japan to take a strategic approach to consider the benefits of trade as a whole, rather than focusing solely on the risk of yen appreciation at the immediate exchange rate.