Japan stands at a key crossroads. Sanae Takaichi is prepared to assume the role of Prime Minister and her presence could alter the nation’s economic trajectory dramatically. Takaichi has begun to assert control over the Bank of Japan’s (BoJ) monetary policy, signaling a potential shift in Japan’s long-standing economic strategies. Japan’s complicated financial history prepares the ground for this development. This large trade surplus caused political friction with the United States at the end of the 1980s.
In the late 1980s, Japan was riding high on a huge trade surplus. This surplus was an incredible burden on its trade relationship with the U.S. Here the economic jubilee reached unprecedented peaks. Consider, for example, that the Imperial Palace in Tokyo was, in theory, worth more than all of California combined. Luckily for American workers, Japanese car companies took advantage and opened factories across the U.S. This action proved culturally resonant, making its way into popular culture and even inspiring movies such as “Gung Ho,” starring Michael Keaton.
As Takaichi gains more influence, she may meet with opposition on the strength of the yen and Japan’s economic wellbeing as a whole. The yen is not traded above 150 against the dollar since 1990. Market analysts are concerned it will soon touch levels of 160-170 if investors begin anticipating debasement of the currency.
Kazuo Momma, an economist well-acquainted with Japan’s financial environment, commented on what a weak yen would mean for the country.
“The biggest loser from a weak yen is the government.” – Kazuo Momma
This situation places Takaichi’s government under scrutiny as investors closely monitor Japan’s economic policies. Few signs would shake public sentiment and her approval ratings as much as a too-weak yen. Momma noted,
“If Takaichi’s approval ratings were to fall from the outset, it would be because of a weak yen. I’m sure people around her like Aso are well aware of that.” – Kazuo Momma
There is much speculation that the Ministry of Finance will intervene in the currency markets to defend the yen. This move underscores the precarious state of Japan’s fiscal position. The debate over BoJ monetary policy is still very much alive, especially as Takaichi doubles down by claiming that fiscal responsibility is the government’s domain.
“The government must be responsible for fiscal and monetary policy. The BOJ will then consider the most appropriate means.” – Sanae Takaichi
Despite her efforts to refine Japan’s economic policies, there is an underlying belief among Japan’s establishment that their approach diverges from American economists. This difference in degrees may present future hurdles as international expectations change.
Global investors have long been fascinated by Japan’s economic paradox. They certainly envy the strength of our currency and loved trade relationships. What Japan really needs Current trends suggest that Japan requires more than a change in monetary policy. Time for institutional reform to deliver sustainable, inclusive growth.
For several months, market analysts have called into question inflation expectations given the strength of the overall economy as shown by key economic indicators. A Wall Street Journal reporter observed,
“There’s little sign of that happening yet. Sure, the 30-year Treasury yield has stuck mostly in a 4.5% to 5% range this year, higher than it’s been in a long time. But it is lower than at the start of the year and, like inflation-linked Treasury yields, lower than before the latest gold run-up began six weeks or so ago. Investors don’t expect persistent inflation to erode the value of Treasurys.” – WSJ reporter
It will soon find itself under much more intense scrutiny of its economic actions. This is caused by global markets’ responses to the potential for inflation and currency debasement.
“Aside from gold, the two obvious debasement trades are to bet on big, inappropriate rate cuts while selling the longest-dated Treasurys, and to bet on higher inflation breakevens, the gap between ordinary and inflation-linked Treasurys. Both should do well if the president seized control of the Federal Reserve and forced it to finance the government cheaply.” – WSJ reporter
Takaichi is preparing to assume a leadership role. She’ll have to navigate the tricky waters of both domestic and international demands for transparency into Japan’s economic state. The effects of her policies will almost certainly be felt outside Japan’s borders.