When “Mr. Yen” is back in circulation, look out.
The reference here is to Eisuke Sakakibara, a former 1990s Ministry of Finance official. Mr. Yen, as he’s known, carved out a late-career role as currency market seer. And to my mind, an odd one, given that Sakakibara often seems more of a contrarian indicator.
A decade ago, for example, Sakakibara was insisting the BOJ would be wrapping up quantitative easing and hiking interest rates within a few years. The yen, it followed, would rally. The BOJ has done exactly the opposite—and then some.
Sakakibara is now arguing an already feeble yen could fall another 10%-plus from around 143 to the dollar. On Friday, Bloomberg quoted him as saying: “It might even go beyond 160, maybe next year.” Around there, he notes, Tokyo authorities “may be tempted to intervene to strengthen the yen.”
Yet the real question is what China might be tempted to do, an imponderable Sakakibara remembers all too well from his Finance Ministry days.
As the third-biggest economy, Japan matters plenty in global policymaking circles. For Washington, though, the real issue is whether Beijing views the yen’s plunge as a rationale for depreciating the yuan as Chinese growth flatlines.
China’s 5% growth target is looking less and less attainable as trade headwinds intensify. At home, Chinese leader Xi Jinping is struggling to address record youth unemployment, a shaky property sector, households more enthusiastic about saving than spending and capital outflows as investors seek alternatives.
Abroad, Team Xi faces even higher U.S. interest rates, disappointing demand from Europe and a yen in relative free fall. Nothing would boost the mainland economy faster than a significantly weaker yuan.
China’s currency is already down 5% this year. An additional drop might convert a key headwind into a tailwind in short order. Yet that would precipitate a race to the bottom on exchange rates that triggers officials in Bangkok, Jakarta, Seoul and beyond to weaken currencies.
Before investors know it, dynamics similar to those that kicked off the 1997-1998 Asian financial crisis might shoulder-check global markets anew.
Few Asian policymakers were more in the thick of things than Sakakibara. He served as Japan’s vice finance minister from 1997 to 1999, back when many investors worried Tokyo might enter the fray, too.
At the time, devaluations in Thailand, Indonesia and South Korea caused one of modern history’s most dramatic domino effects. The resulting chaos pushed Malaysia and the Philippines to the brink. It also put Japan against the ropes.
Case in point: the late 1997 collapse of Yamaichi Securities. The spectacular death of the then-100-year-old institution, one of Japan’s fabled big-four brokerages, absolutely panicked Washington. The idea of Japan also stumbling was almost unthinkable. Was Japan too big to fail, or too big to save?
Naturally, Sakakibara’s phone was exploding at the time. As a western-friendly, fluent-in-English policymaker, Sakakibara arguably played a bigger role than the three finance ministers that led the economy in the second half of the 1990s.
One vital service Japan did for the globe in the 1997-1998 period was by not devaluing the yen. At the time, investors everywhere worried Tokyo might drive the yen lower in ways that would have Beijing following suit. Thankfully, it never happened.
But 25 years later, the yen’s plunge has the globe wondering anew about how China might respond.
Of course, we need to wonder what officials in Tokyo might do, too. Might current Finance Minister Shunichi Suzuki direct Bank of Japan Governor Kazuo Ueda to buy yen in the open markets?
“If I were in the position, at this moment I would do it as a surprise,” Sakakibara says. “I’d be quiet for a while and just do the intervention without it being expected by the market. That would be more effective.”
A weaker yen has its risks. Top among them: fanning the worst Japanese inflation in decades. Consumer prices rose by 3.2% in May from a year earlier. Most of those cost pressures, though, are coming from elevated oil and food imported via an undervalued currency.
A weaker yen, Sakakibara understands, would mean even greater price pressures. If the “Japanese economy overheats as has been expected,” he says, “tightening in 2024 is likely.”
For now, though, the BOJ has its foot on the monetary accelerator. Just three months on the job, Ueda seems reluctant to take risks. This means that Tokyo’s 23-year experiment with QE continues apace.
Yet with Japanese wages accelerating, the BOJ needs to worry about inflation accelerating. The yen pulling Ueda’s attention in the opposite direction leaves his BOJ with a tug of war few central bankers would envy.
All Japanese consumers can do is hope Mr. Yen is wrong about the currency blowing past the 160 mark. But the real concern is whether Xi finds political cover to let the yuan catch up with the yen’s slide. An Asia-wide race to the bottom is the last thing the global financial system needs right now.