Quick Overview
- US Dollar Dominance: The US dollar’s central role in global finance challenges advanced economies, notably Japan;
- Yen Depreciation: Diverging US and Japanese monetary policies have weakened the yen dramatically despite interventions;
- US Scrutiny: The US Treasury has placed Japan on a “monitoring list” for potentially unfair foreign exchange practices;
- Economic Impact: A weaker yen has mixed effects. It boosts exports but raises costs, slows consumption, and risks stagflation;
- Yen Stabilization: Recent yen strength offers hope but highlights the sensitivity of global markets to US monetary policy.
In 1971, then-US Treasury Secretary John Connally made a statement that resonated deeply within global financial circles: “The dollar is our currency, but it’s your problem.” This candid remark highlighted the reality that, although the US dollar was the world’s primary reserve currency, its primary function was to further US interests. Fast forward to today, and while the sentiment behind Connally’s words remains unchanged, the challenges posed by the dollar’s dominance have evolved, particularly for emerging-market and developing economies. However, recent developments indicate that the effects of the dollar’s central role in global trade and finance are now causing significant headaches for advanced economies, with Japan also standing out as a notable example.
Japan’s Battle Against the Rising Dollar
Japan has found itself in a precarious position due to the divergent monetary policies of the US Federal Reserve and the Bank of Japan BOJ. While the Fed has adopted a “higher-for-longer” stance on interest rates to combat inflation, the BOJ has continued its hostile interest-rate policy to counter domestic deflation. This disparity has led to a dramatic yen weakening, which has lost nearly a third of its value since 2021, plummeting to a 34-year low of more than 160 yen per dollar earlier this year. In response, Japanese authorities have resorted to substantial interventions in the foreign exchange markets, spending billions of dollars to prop up the yen. Despite these efforts, the yen’s downward spiral has persisted, underscoring Japan’s challenges in a global financial landscape dominated by the dollar.
The US Monitoring Japan’s Foreign Exchange Practices
In June, the US Treasury added Japan to its “monitoring list” for potentially unfair foreign exchange practices. This move, while stopping short of labeling Japan as a currency manipulator, was significant. The Treasury’s decision was based on Japan meeting two of the three criteria used to evaluate the currency policies of major US trading partners: a trade surplus with the US of at least $5 billion and a current account surplus above 3% of GDP—the third criterion, which Japan narrowly avoided, concerns persistent, one-sided intervention in foreign exchange markets. Nevertheless, Japanese authorities have continued to intervene, spending record amounts to stabilize the yen. In April and May alone, they spent a staggering ¥9.8 trillion, surpassing the total amount deployed in 2022 to defend the currency. Despite these efforts, the yen’s descent continued, illustrating the complex interplay between domestic monetary policy and global financial forces.
The Costs of a Weak Yen: More Than Just a Currency Issue
The weakening yen has had mixed effects on Japan’s economy. On one hand, it has bolstered inbound tourism and increased exports to the US, which could be seen as beneficial. However, the downside has been far more pronounced. The excessive exchange-rate volatility has dampened corporate investment and raised costs for industries reliant on imports. Moreover, over half of the Japanese economy’s private consumption has slowed down considerably. This slowdown has increased the risk of stagflation—a dangerous combination of stagnant economic growth and rising inflation. Consequently, the Japanese government has revised its growth forecast downward for the current fiscal year, from 1.3% to around 0.9%. The situation illustrates the high costs arising from monetary-policy divergence between significant economies and highlights the global implications of the dollar’s dominance.
A Glimmer of Hope for the Yen?
There are, however, some signs that the yen might be stabilizing. In late July, the yen strengthened against the dollar by 4%, its most significant rally since March. Several factors drove this surge, including milder US inflation data in June and a softer labor market in July. This led to speculation that the Fed might improve its aggressive rate-hiking strategy. The BOJ’s decision to raise its benchmark interest rate to 0.25% also contributed to the yen’s recovery. While these developments offer a glimmer of hope for Japan, they also serve as a reminder of how sensitive global markets are to policy changes in the US. The yen’s recent rebound could be fleeting if the Fed resumes its hawkish stance, underscoring Japan’s ongoing challenges in navigating its economic policies amidst the dollar’s pervasive influence.
The Global Ripple Effect of US Monetary Policy
Japan’s recent currency struggles are a stark reminder of the global ripple effects of US monetary policy. For decades, the dollar’s impact was often viewed as a problem primarily for emerging markets and developing economies. However, the current period of policy divergence among systemically important central banks, particularly the Fed and the BOJ, has highlighted that the dollar’s dominance is now causing significant challenges for advanced economies. The dollar’s central role in global finance means that decisions made in Washington can have far-reaching consequences, not just for developing countries but also for some of the world’s most developed economies. As Japan’s experience shows, the greenback’s dominance is a double-edged sword, with implications that extend well beyond US borders. The current financial landscape underscores the need for a more coordinated approach to global monetary policy, considering the interconnectedness of today’s economies and the potential for significant spillovers from one country’s policy decisions to the rest of the world.
In conclusion, the story of Japan’s recent monetary struggles powerfully illustrates the complexities and challenges posed by the dollar’s central role in global finance. While the yen’s woes may be Japan’s immediate concern, the broader issue is the worldwide impact of US monetary policy. As the world’s major economies continue to navigate this challenging landscape, it is clear that the dollar, for better or worse, remains everyone’s problem.
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