When “Mr. Allen” returned to circulation, pay attention.
The reference here is to Eisuke Sakakibara, a former official of the Ministry of Finance in the 1990s. Mr. Yen, as he is known, made a late career as a pioneer in the currency market. And, in my opinion, odd, given that sakakibara often seems like a conflicting indicator.
A decade ago, for example, Sakakibara was adamant that the Bank of Japan would finish quantitative easing and raise interest rates within a few years. This was followed by a rally in the yen. The Bank of Japan did just the opposite – and then some others.
Sakakibara now argues that the already weak yen could fall another 10% from about 143 per dollar. Friday, Bloomberg quotes He told him, “It might even be over 160, maybe next year.” He notes that the Tokyo authorities in the neighborhood “may be tempted to intervene to strengthen the yen.”
However, the real question is what China might be tempted to do, and the uncontrollable Sakakibara recalls well from his Finance Ministry days.
As the third largest economy, Japan is of great importance in global policy-making circles. But for Washington, the real issue is whether Beijing views the yen’s decline as a rationale for yuan depreciation as flat lines for Chinese growth.
China’s growth target of 5% seems less achievable as trade headwinds intensify. At home, Chinese leader Xi Jinping is struggling to tackle record youth unemployment, a shaky real estate sector, households more eager to save than to spend and capital outflows as investors look for alternatives.
Outside, Xi’s team is facing higher US interest rates, disappointing demand from Europe and the yen in relative free fall. Nothing will boost the mainland economy faster than a significantly weaker yuan.
The Chinese currency has already fallen by 5% this year. A further drop could turn a major headwind into a tailwind in short order. However, this would precipitate a race to the bottom on exchange rates that would prompt officials in Bangkok, Jakarta, Seoul and beyond to weaken currencies.
Before investors know it, dynamics similar to those that set in in the 1997-1998 Asian financial crisis may be setting global markets right again.
Few Asian policymakers have been more in the thick of things than Sakakibara. He served as Japan’s deputy finance minister from 1997 to 1999, when many investors worried that Tokyo might enter the fray as well.
At that time, the devaluation of the currency in Thailand, Indonesia and South Korea caused one of the most dramatic events in modern history. Domino effects. The resulting chaos pushed Malaysia and the Philippines to the brink. It also put Japan up against the ropes.
Case in point: the collapse of Yamaichi Securities in late 1997. The stunning death of the then 100-year-old institution, one of Japan’s legendary Big Four stockbrokers, sent Washington into a deep panic. The idea of Japan faltering was also almost unthinkable. Was Japan too big to fail, or too big to save?
Naturally, Sakakibara’s phone was going off at that time. As a policymaker friendly to the West, and fluent in English, Sakakibara arguably played a larger role than the three finance ministers who led the economy in the second half of the 1990s.
It was one of the vital services that Japan provided to the world in the period 1997-1998 by no devaluation of the yen. At the time, investors everywhere worried that Tokyo might push the yen lower in ways that Beijing would follow suit. Fortunately, that never happened.
But 25 years later, the yen’s fall has made the world wonder again how China might respond.
Of course, we need to wonder what the officials in Tokyo might do, too. The current Finance Minister Shunichi Suzuki may be the direct governor of the Bank of Japan Kazuo Ueda To buy yen in the open market?
“If I were in the position, I would do it as a surprise in the moment,” Sakakibara says. I would be quiet for a while and step in unexpectedly. That will be more effective.”
A weak yen has its risks. To top it off: fueling Japan’s worst inflation in decades. Consumer prices rose 3.2% in May from a year earlier. However, most of these cost pressures come from rising prices of oil and imported foodstuffs in an undervalued currency.
Sakakibara knows that a weaker yen means more pressure on prices. He says that if “Japan’s economy is running out of steam as expected, tightening in 2024 is likely.”
For now, though, the Bank of Japan is putting its foot on the monetary accelerator. After only three months on the job, Ueda seems reluctant to take the risk. This means that Tokyo’s 23-year experiment with quantitative easing continues in full swing.
But with Japanese wages accelerating, the Bank of Japan needs to worry about accelerating inflation. The yen getting Ueda’s attention in the opposite direction leaves the BoJ in a bit of a tug of war Central bankers will be envied.
All Japanese consumers can do is hope Mr. Yen is wrong about the currency breaking above 160. The real concern, however, is whether Xi will find political cover to allow the yuan to catch up with the yen’s decline. An Asian race to the bottom is the last thing the global financial system needs right now.