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Opinion

Suga fusses over exchange rates while COVID burns

Tokyo trapped in the financial equivalent of Groundhog Day

| Japan
Money traders of a foreign exchange dealing company in Tokyo, pictured on Nov. 4: there are valid reasons for them to sell the dollar.   © AP

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

As COVID-19 rips through Japan, Yoshihide Suga is training his sights on the real menace: currency speculators.

If only the prime minister displayed the same passion for Tokyo's battle against the pandemic. Hardly, as Suga's team sticks with a "Go To" campaign that risks transporting the virus nationwide. And as his Liberal Democratic Party prioritizes preserving the Olympics above all else.

But the yen's return to the 100-per-dollar level is its own crisis for Japan's political establishment. Its nearly 5% rise this year is a fresh headwind the third-biggest economy could do without right now. And it is a reminder that Japan is going full circle from the promising days of December 2012.

That was back when Shinzo Abe declared war on yen bulls. Prime Minister Abe and his hand-picked Bank of Japan Governor Haruhiko Kuroda weakened the yen by 30%. And for a time, the depreciation worked. Japan was enjoying its longest expansion since the 1980s until the coronavirus hit. Yet as Suga suits up for battle with currency markets, three inconvenient truths are worth considering.

One, this is a losing battle. Though Abe's success with a weaker yen is freshest in our collective memory, this tug of war has been going on for at least 25 years.

Since at least Tomiichi Murayama's 1994-1996 stint as prime minister, Tokyo has been cajoling traders to stop bidding the yen higher. Back in my Washington reporting days in the late 1990s, Eisuke Sakakibara, then-vice finance minister, seemed to visit weekly. Mr. Yen, as he was known, has since been replaced by countless officials taking turns to talk down the yen.

In 2004, then-Prime Minister Junichiro Koizumi's government spent the annual gross domestic product of Indonesia intervening in markets to cap the yen. It was no surprise that his protege, Abe, would make yen weakness the centerpiece of his revival scheme.

Japanese have seen this movie before. Suga's effort to draw a line in the sand at 100 yen is the financial equivalent of Groundhog Day. Like the Bill Murray character trapped in the same day, Tokyo is trapped in a seemingly perpetual policy of limited utility. If Abe's weak yen had worked, growth might not have cratered 7.3% in the October-December 2019 period after a modest sales tax increase. And the broader economy might not have collapsed amid COVID fallout.

Two, this is more about the dollar. Admittedly, Japan can seem an odd safe haven for investors: deflationary forces; an aging population colliding with ginormous debt; subzero interest rates; a zombified bond market half-owned by the BOJ. Yet between the wreckage Donald Trump leaves behind in the U.S. and the Brexit mess stalking Europe, Japan looks good enough. It follows, then, that there are valid reasons for traders to sell the dollar, and perhaps aggressively so.

Not least of which is a $27 trillion national debt careening toward $30 trillion. The Federal Reserve is stuck with a Japan-like future of subzero rates and little to no inflation. And COVID is raging across the U.S. while outgoing President Trump ignores both the pandemic and the economic pain to come.

U.S. President Donald Trump, pictured on Dec. 12: outgoing Trump ignores both the pandemic and the economic pain to come.   © Reuters

Frankly, it is shocking that Washington retains AAA status from Moody's Investors Service and Fitch Ratings. The only plausible explanation for not downgrading Trump Nation is fear of mutually assured destruction. Doing so now might make 1929 great again.

Japan can try to hold back this tidal wave of negativity toward the dollar. Doing so in 2021 will require several Indonesia-sized bouts of intervention. And even that is unlikely to get the yen back to the 110-to-the-dollar range that Japan Inc. craves.

Three, strong currencies have silver linings. Speaking of Groundhog Day, imagine if the LDP could have a redo. Imagine if Suga's party could go back to 2004, or 1994, and just accept that markets value the yen higher than Tokyo likes. It could have used the last 16 years pressuring companies to increase competitiveness and relocate the innovative spirit of old.

Tokyo could have spent that decade and a half loosening labor markets, cutting bureaucracy, shifting the tax code in favor of startups, empowering women, devising innovative energy policies and putting out the welcome mat for foreign talent. Instead, government after government squandered much of that time by dueling with currency speculators.

Imagine if prime ministers from Murayama to Koizumi to Abe had cribbed from the German playbook, not Thailand's. In recent decades, German companies did not bellyache about strong exchange rates. They adapted and harnessed them to invest in new technologies, increase productivity and move steadily upmarket.

Japan, by sharp contrast, maintains a rather developing-nation view of exchange rates. That might be fine for Thailand or Vietnam. But it takes the onus off Japan Inc. CEOs to restructure and take risks on new ideas, products, and ventures to stay ahead of China and Southeast Asian upstarts.

The year ahead could be brutal if Tokyo does not get a handle on the latest COVID-19 wave. And surely, the strong yen will not help. It is time Japan stopped reliving the same futile policy again and again. The economy deserves a happier ending.

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