(The original article in Japanese was posted on September 30, 2022)

On September 22, the Governor of the bank of Japan (BOJ) Haruhiko Kuroda announced that the central bank would maintain its large-scale easy monetary policy “for the time being” at a press conference following the Monetary Policy Meeting. Immediately after the announcement, the yen fell drastically to 145.90 against the dollar. In response to the yen’s abrupt fall, the Japanese government decided to intervene in the market to buy yen for the first time in 24 years to “reduce excess volatility.” Japan is estimated to spend around 3 trillion yen for the intervention and the yen was temporarily propped up to 140.31 to the dollar. However, it tumbled to 144 level on the next Monday, partly because the U.S. and EU immediately ruled out participation in any coordinated intervention to support the yen. There seems no change in the basic trend of the yen's depreciation.

Primarily, it was commonly assumed that BOJ would stick with the easy monetary policy. Nevertheless, the sharp decline of the yen occurred triggered by Mr. Kuroda’s comment noted during a press meeting, saying that “for the time being” actually meant for two to three years not for two or three months. Considering that his term of office will end next April, his comment will convincingly restrict policy options for the next BOJ governor and what is more, it is almost like making a pledge of the inflexible monetary policy. Given this situation, if markets share reassurance that “there is no policy change in the foreseeable future,” the market intervention would rather facilitate speculative moves. For the purpose of controlling the markets effectively, it was absolutely an unnecessary verbal intervention.

Needless to say, the weak yen is attributable to the widening gap in interest rates between Japan and the United States. Accordingly, some argument has been raised that BOJ should change its super-loose policy since Japan stands alone among major countries maintaining extremely low interest rates. However, the problem is not that simple. In fact, the underlying factor is the exceptionally strong dollar against the major currencies. In other words, it seems quite difficult to make a trend reversal of the markets until U.S. inflation is halted and the strong dollar’ peak-out is predictable. Besides, the yen also involves a structural problem as the "extra-dimensional easing" approach continuously taken since 2013 failed to reach the targeted 2% price increase. Based on the fact that yen has weakened while real wages have not been raised and that a cost of living has increased as a result of escalating prices of resources, shift to a tightening monetary policy at this point will not only break business conditions but also bring about another serious life-or-death matter to smaller companies that are still struggling for a survival after the disastrous Corona virus pandemic.

As you know, the strength of a currency equals its yielding power, or in a way, it shows our trust in the future of the nation. In this sense, the yen itself may relatively be losing its growth expectations. For global companies, if overseas sales denominated in foreign currency are converted into yen, they will yield additional business income in proportion of the depreciation rate of the yen. That’s why the weak yen is one of the factors that support the prosperous businesses of global companies. However, when looked on a dollar-based transaction, a weak yen is nothing more than a decline in national strength. A rate of 140 yen to the dollar implies that Japan's GDP is equivalent to the level back in the early 1990s. Obviously, inbound demand will grow, and price competitiveness in exports will increase. But then, is it acceptable to settle in "cheap Japan"? Remember that Japan will never enhance its presence without sustainable growth or improvement of productivity supported by high value-added products. In short, it is not just a matter of monetary policy. It is high time to call for a fundamental shift in industrial policy from a long-term perspective.

This Week’s Focus, September 30

Takashi Mizukoshi, the President