Monday, August 23, 1999
The yen's run-up to around ¥111 to the dollar during the third week of August reflects a combination of factors. Only a few weeks earlier it was around ¥120=$1.00. The emerging consensus that the Japanese economy is at least not getting worse has removed what would otherwise be a source of downward pressure on the currency. In fact, one way to view the run-up, to the highest level in about six months, is that the yen has returned to a position that in the past half decade has been associated with expectations of a modest recovery. Hopes are higher in this regard than they were a year ago, but not necessarily compared to three years ago.
The Japanese currency's value may also be related to policy disputes between Washington and Tokyo as well as to domestic Japanese politics. The Clinton Administration, as usual, does not want Japan to even think about exporting its way out of recession. But, it may feel (with good reason) that Tokyo is reluctant to take the alternative course of coming up with another big economic stimulus package at an early date. If so, letting the yen rise is a way of putting pressure on Tokyo to put aside its reluctance. The yen's appreciation can be expected to lead to fewer exports and more imports (indeed it already has),. reducing aggregate demand and making a stimulus package seem like a necessary step.
For its part, Tokyo's strategy may be motivated by a bit more than a simple reluctance to let its currency rise. If the yen's run-up continues, and pressure for a stimulus package rises, then it would face fresh concerns about increasing its already enormous budget deficit still further, with possibly destabilizing effects on long-term interest rates, as occurred late last year and early this year. It has said it wants to hold off a stimulus decision until new gross domestic product data are released around September 10. It will probably get its wish as to timing, but the size of the package will depend in part on what happens to the currency in the meantime.
Moreover, the government of Keizo Obuchi faces a lower house election sometime over the next 15 months. Obviously Mr. Obuchi would like to make two claims to the voters concerning the economy:
That is why, on economic logic alone, Tokyo should do the stimulus package now and the have an election before its (possibly minimal) effects are known. As such Mr. Obuchi could argue that
But coalition politics rule out an election now. (See JEI Report No. 32B, August 20, 1999). But If Tokyo did a stimulus package now, the risk is that, by the time the election is held, probably next year, the stimulus package might have proven to be a failure and the economy could be in the tank. That would be the worst combination in political terms.
This line of thought implies that Tokyo will want to hold off on the stimulus package as long as it can or even do a small package in September and another closer to the election. At that time, the government will at least be able to say it is doing something about the economy. This implies that Tokyo would like to keep the yen relatively weak to hold off pressure for an early, big package. Of course, this preferred option runs directly counter to Clinton Administration desires,which does not want to see exports replace, even temporarily, other sources of aggregate demand.
If the yen rises relatively slowly, Washington will get its way and Tokyo will face rising pressure to do something on domestic economic policy, the politics of the situation notwithstanding. If the yen surges (and the dollar appears to be crashing), the Clinton Administration would abandon what appears to be their strategy and join Tokyo in what would probably be successful currency intervention to stabilize the yen and the dollar.