Mr. Fujii speaks
Shortly after their dramatic election win, the finance minister appointed by the Democratic Party of Japan gave an interview in which he said that under normal circumstances (which today’s are) the new government had no intention of intervening in the currency markets to influence the value of the yen.
At first glance, this seems like a statement of the obvious. This biggest reason that governments have stopped intervening in the currency markets in recent years is that they have learned that even with multi-national coordination their resources are dwarfed by those of the big global commercial banks. In other words, national governments no longer have the power to make their currencies move as they might like.
Two messages
I don’t think that this is the point, though. I see this statement as containing two messages, one internal and one external.
1. The internal message is to the Japan Business Federation (Keidanren). Throughout the Liberal Democratic Party rule, the Japanese government was committed to the export-oriented manufacturing model of economic development. As late as 2004, Tokyo was intervening in the currency markets in an attempt to lessen the volatility of the yen, and, implicitly, the profits of Japan Inc. The message is that the cozy old relationship is gone.
2. The fact that Japan was defeated by the US in WWII had a profound effect on the attitude of an earlier generation of Japanese leaders toward the US. The burden of having lost the war compelled them to accede to American government requests that were not in the Japanese national interest. Limiting for the first half of the Eighties the number of automobiles it would export to the US to levels way below what American consumers wanted to buy, because Washington requested it, is a prominent example. Participating in coordinated currency intervention in support of the dollar has been another.
This is an attitude that was already gradually fading as politicians who experienced WWII left public life. It is also one that former prime minister Koizumi took great pains to try to change. The DPJ message is simply–No more.
Investment conclusions
Why is this of any investment interest at all?
For one thing, Japan has been one of the staunchest economic allies of the US over the past fifty years. Its changing relationship with the US is emblematic of attitudes in the rest of the world.
The Democrats seem also to be thinking that a currency crisis involving the dollar is not so far-fetched and is saying in advance that it will not be part of a dollar rescue.
Finally, they may be saying that the old “convoy” system, where the strongest members of an industry slowed themselves down while they and the government propped up the weakest–resulting, of course, in plenty of very weak firms in each industry, is also out. If so, that would be a very good thing for the best Japanese firms, like Toyota, Honda or MEI, who will no longer be held back by the clunkers in their industries.