In the Global Finance section of today’s Print edition of the Wall Street Journal there is an article (see Investors are betting in Yen’s strength) that exposes both the weakness of the current response to our global economic crisis in terms of politics and policy. The article explores how, with a strong yen against the dollar, Japan’s leadership will be pressured to increase quantitative easing. The yen has risen 3% against the dollar so far this year, despite the Fed increase in interest rates. This is mainly due to investor behavior changes in Japan, as money moves from more risky assets towards more trusted assets.
The natural, local and sovereign response from the Bank of Japan would be to lower rates and inject more money into the economy, known as quantitative easing (QE), to help weaken the yen. But this might in fact reinforce the weakening faith in a stronger Japanese economy.
Worse, the behavior simply puts more volatility back into the global economy. If Japan tries this approach, other regions may well respond kind in order to preserve their notional attempt at recovery.
You would likely see the ECB follow with similar efforts: even pressure on the US to slow its planned rate rise, or reverse its recent rise, would increase. Thus the attempt by Japan to weaken its currency would simply attract a backlash from other sovereign states and regions that would likely put the yen back where it started. And central bank control of the global economy would be even more stretched.
Japan should, with its large partners, first agree a coordinated plan of what currency exchanges should be sustained or changed spanning the dollar, yen, renminbi, euro and sterling. Then all nations should publish their goals and then act accordingly. It maybe that Japan needs to let the yen rise for now, in order to help the bigger challenge. The needs of the many outweighs the needs of the one – and all that Spokish talk. But the one-off individual responses we see every week are ruining our chances of recovery. We face a global challenge and this challenge warrants a global response. We are not seeing this yet.