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Inside Japanese politics

Suga draws line in the sand: Defend '100 yen' dollar barrier

Japanese leader braces for another Democrat entering the White House

Japanese Prime Minister Yoshihide Suga looks on during a news conference in Tokyo on Dec. 4.   © Reuters

TOKYO -- A shock wave ran through Japan's Finance Ministry in early November after news broke of Joe Biden's presumed victory in the U.S. presidential election -- not because of the outcome of the race, but because of an order from the prime minister's office.

"Make sure the yen-dollar exchange rate does not cross the 100 yen mark," Prime Minister Yoshihide Suga told Finance Ministry officials. His comment, which was confirmed by multiple sources, came with an unspoken message: Be prepared to sell yen for dollars in case the Japanese currency breaches the key threshold.

Suga's willingness to consider an intervention -- an option often seen as a last resort -- took many by surprise.

Tokyo-listed exporters need the yen to stay at 100.2 to the dollar or weaker in order to turn a profit, according to a January survey by the Cabinet Office. Any stronger and their earnings would suffer, which in turn would weigh down their stock prices and kick off a negative feedback loop that squeezes the Japanese economy as a whole.

But Japan has not intervened in the currency market since 2011. The director of the Ministry of Finance's foreign exchange markets division, the government's point man on interventions who orchestrates them from the fourth floor of the ministry, has been in effect out of work during the Trump administration.

If Japan were to intervene in the market, the decision would come from the second floor, where Finance Minister Taro Aso and Kenji Okamura, the vice minister for international affairs, Japan's top financial diplomat, have their offices.

Then the fourth floor staff would instruct the Bank of Japan to conduct the operations. The central bank would in turn place orders with private financial institutions.

Japan's Finance Minister Taro Aso walks up the stairs of the Finance Ministry in Tokyo. Japan has not intervened in the currency market since 2011.     © Reuters

U.S. President Donald Trump's threats of additional tariffs on even allies such as Japan, as part of trade talks, have made such interventions difficult. The American president is of the mind that weakening one's own currency confers unfair trade advantages and has made it an issue in trade negotiations.     

The exchange rate is currently between 102 and 104 yen to the dollar. With the yen starting to enter treacherous territory, Suga is keeping a close eye on the currency market just as he did during his almost eight years as former Prime Minister Shinzo Abe's right-hand man.

"Managing foreign exchange risks is one of my key priorities," Suga said when he was chief cabinet secretary.

When Abe became prime minister at the end of 2012, the Japanese currency had strengthened to less than 90 yen to the dollar. He managed to stabilize the rate through aggressive policies, including quantitative and qualitative easing by the Bank of Japan, which contributed to a recovery in corporate earnings and higher stock prices. A strong economy paved the way for him to become Japan's longest-serving prime minister in history.

Suga won the race to replace Abe as leader of the ruling Liberal Democratic Party in September by a landslide, largely thanks to his central role in Abe's government and his promise of continuing with Abenomics policies. Unstable markets could undermine his authority on economic issues.

"Stable currency rates are extremely important," Suga told parliament on Nov. 6.

Japan's last intervention round in 2011 was when the yen hit a record high of around 75 to the dollar following the Fukushima earthquake and tsunami.

Japan is also believed to have considered an intervention in 2016, when the yen strengthened to around 99 to the dollar. But it decided against the option given that the U.S. Treasury had just placed Japan, along with China and others, on a "monitoring list" for currency manipulation.

Why, then, did Suga send the instructions to the Finance Ministry after Biden's election victory?

The answer lies in the history books of U.S.-Japan relations, explains a Ministry of Finance alumnus.

"The bitter memories of Japan being troubled by past Democratic administrations do not disappear easily," the retired official said.

In the 1990s, the Clinton administration continued to make verbal interventions into the currency market, driving the yen up as a means of fixing the trade imbalance.

It was also the Democratic administration of Barack Obama in 2016 that included Japan in the watch list. Suga, then the chief cabinet secretary, was at the front line handling the repercussions.

It would be no surprise if the now-prime minister braced himself at the thought of another Democrat entering the White House and the possibility of the Japanese currency surging past the 100 yen level.

When the America-friendly Junichiro Koizumi was prime minister, known for his strong personal relationship with then-President George W. Bush, Japan's market intervention totaled 35 trillion yen during the period from January 2003 to March 2004, according to JPMorgan Chase.

This was when the yen was weaker than it is today.

After Koizumi stepped down, Japan's prime minister changed on a yearly basis. Then, the Liberal Democratic Party lost power to the Democratic Party.

From 2009 to 2010, during the transition of power, Japan could only accomplish a 2 trillion yen intervention, despite the yen skyrocketing to 80 yen to the dollar.

"A long-term, stable administration and a strong Japan-U.S. relationship contribute to the stability of the yen market," said Tohru Sasaki, J.P. Morgan's head of Japan market research.

Those history lessons linger in Suga's mind as he sits in the driver's seat of Japanese politics. With less than a year left in the lower house term, by the end of which a general election must be held, "he would want to avoid a situation where stock prices fall and consumer sentiment dampens," said Yuji Saito, head of FX sales at Credit Agricole.

A key juncture will be his first meeting with Biden, which the Japanese side hopes will be in February. He knows that what comes out of that meeting will impact the future of the Japanese economy.

Inside Japanese Politics is a column that focuses on the details and inner workings of Tokyo statecraft, policy and foreign relations.

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