Friday, June 19, 1998
The surprising American intervention in currency markets has had the desired effect, at least for the moment, of reversing the yen's relentless drop. In a matter of days, the Japanese currency has gained about ¥10 in value against the dollar. By all accounts, everyone is pleased except for the currency traders who no longer could bet on what had been a sure thing the yen getting weaker.
The latest action was based more on political than economic imperatives. Tokyo, for example, ordinarily would have little reason to want its currency to be stronger inasmuch as it makes life more difficult for Japanese exporters. The Clinton Administration, for its part, would not normally welcome a weaker dollar because it could fan inflationary fears.
Politics pointed to a different set of calculations. Beijing was revving up a not so subtle campaign that Japan and its currency were responsible for China's growing economic difficulties; the intervention undermines that argument and raises Tokyo's stock in Chinese eyes. By defending the nation's currency, the government of Ryutaro Hashimoto also appealed to domestic economic nationalists ahead of a July election. The Clinton administration similarly was seen as acting decisively at a time when some analysts question its vigor. Moreover, the actions cannot hurt relations with Beijing ahead of a presidential visit there this summer.
The Clinton administration, of course, extracted a price from the Hashimoto government for its help in the form of promises regarding financial sector cleanup and economic stimulation. Veterans of U.S.-Japan disputes can already anticipate protracted and possibly bitter disagreements over exactly what Tokyo promised. These misunderstandings could undo whatever political gain to the bilateral relationship that resulted from the intervention.
"JEI's Spin on the News" are the opinions of one of more members of JEI's staff and do not necessarily represent the views of the organization.