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Halting yen slide is Japan's problem in chaotic global economy

World puzzled about Tokyo fretting over issue of its own making

U.S. Treasury Secretary Janet Yellen, left, barely acknowledged concern over the weakening yen expressed by Japanese Finance Minister Shunichi Suzuki during a G-7 meeting on April 21.

TOKYO -- There was no discussion after Japanese Finance Minister Shunichi Suzuki expressed concern about "the recent, somewhat sharp depreciation of the yen" at the Group of Seven meeting of finance ministers and central bank governors in the U.S. on April 20.

Little wonder.

With Russia's invasion of Ukraine, the global economy is effectively in a state of war. Energy and food prices are stoking inflation, with the U.S. and Europe struggling mightily over the turn of events. Hence, the two have little time to stress over a weak yen, an issue that seems to be of major importance only to Japan.

The dollar "is our currency, but your problem," said then-U.S. Treasury Secretary John Connally in 1971 at the G-10 Rome meetings after the Nixon shock of the same year, referring to when the U.S. abandoned the standard of exchanging gold for greenbacks.

At the time, Japan -- anxious about the rapid appreciation of the yen -- interpreted Connally's infamous statement to mean that "The problem is all of you who have accumulated trade surpluses."

Since then, the U.S. had long used the dollar-yen rate as a means to prod Japan to correct its trade imbalance by encouraging domestic demand.

But into the first quarter of fiscal 2022, the situation has drastically changed. Japan had a trade deficit of about 5.4 trillion yen ($41.96 billion at current exchange rates) in the previous fiscal year.

In a chain of events, soaring energy prices and a weakening yen have caused the cost of imports to surge, with the widening trade deficit leading to a further depreciation of the yen.

Japan's phobia of a strong yen is already a thing of the past. Now everyone fears a "bad, weak yen," which will continue in the absence of price adjustments and wage increases.

Suzuki also raised the issue in his April 21 meeting with U.S. Treasury Secretary Janet Yellen, showing figures and noting that "the recent depreciation of the yen has been sharp." The Japanese side wanted to cooperate with the U.S. to discourage the market from selling yen.

Yellen, however, did not budge, and there were no indications that the U.S. was sympathetic to Suzuki's concerns. The U.S. Treasury Department's statement after the meeting noted briefly that the two sides "discussed financial market developments, including foreign exchange markets."

But is Japan really trying to stop the yen's slide? The U.S. likely harbored doubts.

The root of the current depreciation stems from the widening interest rate gap between the U.S. and Japan. If Tokyo wants to stop the yen from weakening, it must allow a modest rise in interest rates.

But again, this runs contrary to the Bank of Japan, which will do everything to stop rates from rising.

The BOJ decided on Thursday to retain its loose monetary policy and reiterated its commitment to the 10-year yield target, saying it will conduct an unlimited fixed-rate operation to buy 10-year Japanese government bonds at 0.25% every day.

Soon after the announcement, the yen slid to 130 against the U.S. currency for the first time in 20 years in afternoon trading in Tokyo, compared with 128.68 at noon.

Long-term fiscal worries seem to be guiding the central bank. If the BOJ reduces monetary easing, servicing just the interest on government debt would increase dramatically. According to an estimate by the Ministry of Finance, a rise of 1% would see government debt-service increase by 3.7 trillion yen.

Regardless of how much Finance Minister Suzuki talks about a "bad, weak yen," he really wants the BOJ to keep a lid on interest rates. One could say that the high cost of delaying Japan's return to fiscal sanity is evident in its weaker yen policy.

Despite this, the government decided on Tuesday to allocate 6.2 trillion yen in funds to address rising commodity prices, requiring additional government debt. If fiscal consolidation becomes even more distant, the BOJ will find it increasingly difficult to tighten monetary policy.

While expressing concern about the weaker yen leading to higher import prices, Japan will not allow higher interest rates that prevent depreciation -- a troubling dichotomy when viewed from outside the country.

Secretary Yellen likely wants to follow Connally's lead and say, "This is your problem."

Halting the "bad, weak yen" narrative amid a war-ravaged global economy will require an explanation convincing enough to at least win cooperation from the U.S.

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