A DESPERATE ATTEMPT TO EVADE WARNINGS
Japan has a long history of intervening in currency markets, sometimes to prevent the yen’s rapid appreciation and sometimes, as is the case now, to limit its depreciation. The US Treasury’s involvement is the new wild card.
Is there logic to coordinated intervention? Currency markets have a tendency to overshoot in one direction or the other when circumstances change. Smoothing out such volatility is a legitimate reason for intervention.
Adding the Treasury’s firepower will surely scare off speculators trying to profit off unwarranted volatility in the yen. But such interventions invariably fail to stem the tide when they are not supported by policy changes.
In fact, the yen’s depreciation is hardly the result of a surge in volatility. Before the recent intervention, it had lost about a third of its value relative to the dollar since 2020.
Japan is a rich country but has an ageing population and a huge level of government debt. It has experienced anaemic growth in recent years, and rising oil prices could increase inflation, making the yen worth less. These factors feed on themselves; a falling yen would make things worse by raising the price of imports.
By contrast, the American economy and labour market look robust. Inflation has persistently remained above the Federal Reserve’s target. So the Fed is increasingly likely to raise interest rates this year, making US short-term government debt more attractive to foreign investors.
This is bad for the yen, given the already large differences between US and Japanese interest rates, but might seem fortuitous for the United States. With no sign of any discipline on fiscal matters, it will probably result in Washington digging itself into an even deeper debt hole.
So the two economies are in different places. But they are tied together by one big problem: unsustainably high levels of government debt.
Currency market intervention is a desperate attempt by Tokyo and Washington to evade the blaring warnings from financial markets. In the end, neither government is likely to outrun the discipline that market forces bring to unrestrained debt accumulation. Perhaps it’s time both countries learned a lesson from Argentina.
Eswar Prasad is a professor at Cornell University and a senior fellow at the Brookings Institution. His latest book is The Doom Loop: Why the World Economic Order Is Spiraling Into Disorder. This article originally appeared in The New York Times.
