How maddening the furor over the yen must be to Japan's central bankers.
Just weeks after thumbing the
Ministry of Finance
, which had publicly harangued the
Bank of Japan
to embrace monetary policy as a mover of exchange rates, central bankers once again find themselves defending their turf. Rather than fending off supercilious bureaucrats this time, however, central bankers are protecting themselves from prying politicians.
The battle stems from news Friday that the three parties in
Prime Minister Keizo Obuchi's
new ruling coalition had agreed to pester the BOJ, which has guided market rates to just about zero, for even looser policy. Some people have been chattering about the need for a quantitative easing.
The tripartite accord, unsurprisingly, prompted BOJ Deputy Governor
to cancel a planned trip to Paris. And for good reason: Quantitative easing is financial talk for "print money," an activity that almost always causes inflation and is considered irresponsible by monetary authorities in most developed economies. Sure
Massachusetts Institute of Technology
Professor Paul Krugman has called on the bank to target inflation levels. And others have called for coordinated, unsterilized intervention in the currency market to ensure Japan doesn't skid into deflation. But neither Yamaguchi nor his boss BOJ
Governor Masaru Hayami
wants to take the potentially reckless act, spurring prices higher. Isn't that what got Japan in trouble in the 1980s, at least with assets?
Trouble is, without extra cash sloshing through the $4 trillion Japanese economy, the yen may continue to strengthen. Over the past 12 months, it's risen about 15% against the dollar. And as the yen bolts higher, it brakes the speeding
, itself up a handsome 31% over the same period.
Currency weighing on the Nikkei is nothing new. Japan is perceived to be an export economy; Americans just love their
. A stronger yen, so the thinking goes, means higher prices in malls across America. Higher prices mean fewer consumers. Fewer consumers ... you get the picture.
That logic, of course, conveniently ignores the fact that Japanese cars are made in Ohio and electronics in Malaysia. In fact, Japanese exports total about 15% of the economy, roughly the same percentage as in the U.S. Rather than being an export economy, one could argue, Japan is an import economy. That's right. Japan imports money.
Think of it this way: Every
sold in New Jersey and every
purchased in Pennsylvania means U.S. dollars to be repatriated (in the form of Japanese yen) to a parent company in Japan. And as the yen strengthens, each dollar buys fewer of them, cutting into corporate profits. Some big companies, like
, get as much as half of their profits from overseas.
Analysts, however, point out that even if the BOJ, which meets again Wednesday, hesitates to get involved in the currency market, stock traders have little reason to think the Nikkei may once again go into a mini-tailspin.
has shifted to a tightening bias," notes Masuhisa Kobayashi, an analyst with
in Japan. "And as long as the BOJ maintains its accommodative stance it will rival the impact of coordinated intervention."
While currency and the central bank will dominate center stage in the coming week, don't forget to cast an eye on Japanese banks.
announced late last week that they would merge, creating Japan's third-largest bank with assets of 59 trillion yen ($549 billion). The move follows a similar alliance announcement by
Industrial Bank of Japan
Dai-Ichi Kangyo Bank
. More banks are expected to follow a similar path.