B Opinion

They say that when a butterfly flaps its wings in Tokyo, it can cause a tsunami somewhere else. We had the biggest intervention to prop up the yen on record. It wasn't just the Japanese buying yen to strengthen it; the US Treasury got involved as well. Why? The yen has been weakening steadily for decades. It's basically lost two-thirds of its buying power compared to everybody else over the last three decades. That makes Japanese goods competitive but it makes it far too easy for foreigners to buy up Japanese assets. This isn't the first intervention. There's been a series of interventions not involving the US over the last few years, and you'll notice there's a common thread, which is that none of them have worked. The big difference this time is that the Americans are also involved. That's probably because first of all there is a desire to do a political favor to Sanae Takaichi who is a similar kind of conservative populist to Donald Trump and who they might well want to do a favor to. But also because there are risks to financial stability for the global system if the yen goes too far. Two years ago, you saw a very, very sharp appreciation of the yen, and that lead to sell-offs around the world for a few weeks. We don't want a repeat of that. Is this going to work? Now, you could argue that it might well not because ultimately this depends on Japanese monetary policy and Japanese fiscal policy. Monetary policy – its interest rates are far lower than everyone else's. That makes it far less attractive to park money in the yen. And its fiscal policy – the country famously has a huge overhang of debt. That makes it much less attractive to park in Japanese assets, all other things equal. So you can see why the Japanese and the American authorities have intervened. Japan needs to borrow less and charge more for that borrowing.