Everybody Is Talking About The Japanese Yen Collapse, But Nobody Understands The Prime Minister's True Motivations

The Japanese yen has been in near freefall against the dollar since late September. The Bank of Japan had just announced an expansion of its monetary stimulus, and BoJ Deputy Governor Hirohide Yamaguchi gave a dovish speech defending the central bank's actions.

Also in late September, Shinzō Abe was elected as the leader of Japan's LDP party, which before December's general elections was the main opposition party in parliament.

It was becoming pretty clear to markets that Abe could become Japan's next prime minister, bringing a dovish fiscal and monetary policy stance to the post, and he was ultimately elected to that office on December 16, returning the LDP to power in Japan.

The reason for the yen's sharp decline as of late is simple: Abe ran on a bid to revive Japan's long-moribund economy, and he's even gone so far as to threaten to strip the Bank of Japan of its independence – a rather unprecedented move in modern central banking that has economists and commentators buzzing around the world – if the Bank refused to take a more aggressive easing stance by raising its inflation target to 2 percent.

But what if, for all the talk of unprecedented aggressive monetary policy coming down the pike, that's really all it is – just talk?

That's what Stony Brook finance professor Noah Smith argues in his latest piece.

Of course, the power of simple "talk" isn't unique to Japan's situation – arguably the central banking theme of 2012 has been the role of simply influencing the market's expectations as a way to ease without actually easing. However, in order for central banks to change the market's expectations about the future course of monetary policy, the threat of future interventions has to be credible.

Smith suggests, though, that while Abe has been successful so far in "talking down the yen," there may not be much more to his plan – and all of the talk about stripping the BoJ of its independence may just be a big bluff.

In fact, according to Smith, it's likely all just a cover for Abe to proceed with what he really cares about – pushing through legislation on social and foreign policy issues that will shift Japan far to the right of the political spectrum in many ways.

One particularly egregious and controversial example of this is Abe's attempts to revise an apology Japan issued in 1993 to women who were forced into sex slavery by the Japanese military during World War Two.

Martin Fackler wrote about the controversy in yesterday's New York Times:

Speaking a day after the new cabinet was named, the official, Chief Cabinet Secretary Yoshihide Suga, who serves as the government’s top spokesman, refused to say clearly whether the new prime minister, Shinzo Abe, an outspoken nationalist, would uphold the 1993 apology.

Mr. Suga said at a news conference that it would be “desirable for experts and historians to study” the so-called Kono Statement, which acknowledged the Imperial Army’s involvement in forcing thousands of captured Asian and Dutch women to provide sex for Japanese soldiers. Most historians say the women were coerced and were not prostitutes, as Mr. Abe and other nationalists have claimed in the past.

That may sound a little wild – especially when such a gesture will likely stoke tensions with Japan's Chinese and Korean neighbors – but it highlights just how focused Abe is on his nationalist agenda.

This is central to Smith's argument that all of this talk about monetary easing was just a trick to get Abe re-elected once again, so he can focus on these social issues that he cares about most.

Smith writes in his piece:

Instead, what I mean is that Abe really just does not care very much at all about the economy. I mean, of course he wants Japan to be strong, and of course he doesn't want his party kicked out of power. But his overwhelming priority is erasing the legacy of World War 2, with the economy a distant, distant second.

This is why Abe allows himself to be surrounded by corrupt and incompetent people. He is entirely focused on his cultural conservative quest. The other day Abe  called Obama "Bush" . He just deeply, truly, does not care about stuff that does not involve boosting Japanese nationalism.

This argument actually makes a lot of sense if you look at Abe's history. He is, in fact, a career politician. Abe graduated with a degree in political science in 1977, and by 1982, he had entered the political sphere, where he has remained since.

Yet 1982 doesn't even really mark Abe's first foray into the world of politics. Abe was born into something of a political dynasty in Japan. His grandfather served as prime minister, and his father and other grandfather were politicians as well. In other words, politics is all Abe has really ever known. 

Smith continues to hammer on this idea that as a career politician, Abe is really just interested in political issues:

By making lots of noise about revoking the BOJ's independence, Abe is trying to convince foreigners that inflation is on the way, thus sending the yen south. Basically, he is taking a page out of the LDP's old playbook - weaken the currency, pump up exports. Sure, it's not a sustainable strategy, but Abe doesn't need it to be sustainable; he just needs it to give the economy a fillip for long enough to let him complete his precious revision of the Japanese constitution. After that, he couldn't care less about what happens to the economy. It's a cursory, stopgap measure. To Abe, Japan's pride as a nation is infinitely more important than the fatness of its people's wallets.

This perspective leads Smith to hypothesize that those hoping for Japan to take center stage as ground zero of the world's next big monetary policy experiment in 2013 will likely be disappointed in a big way.

Smith writes:

So what does this mean for monetary policy? It means that Abe is targeting exchange rates, not inflation (or NGDP). He'll do what he has to do to tweak foreign expectations enough to keep the yen weak, but he won't actually follow through and revoke BOJ independence. And even if by some miracle he does revoke BOJ independence, he won't insist on a hard inflation target. A non-independent BOJ wouldn't be controlled by Shinzo Abe, it would be controlled by the Ministry of Finance, and those people are just as likely to fear the peril of hyperinflation.

Expect Abe to continue making noise at the BOJ, and expect to see some token BOJ response, i.e. a bit more quantitative easing. If the yen starts rising again, expect Abe to switch gears and start talking about (or actually carrying out) currency market intervention of the type carried out in 2004. Essentially, he will continue the current talk of radical monetary policy experimentation precisely as long as he thinks it's holding down the yen, and then abandon it for a different mercantilist stopgap. Do not expect any real action against the BOJ.

Smith's whole piece is well worth a read. Check it out here >

More From Business Insider


Get stories like this on the Yahoo app and discover more every day.
Download it now.
  • Mobile, video pump up profit at Google parent Alphabet
    Mobile, video pump up profit at Google parent Alphabet AFP News - 9 minutes ago

    Google parent Alphabet delivered higher profits for the third quarter, lifted by gains in mobile and video advertising as the tech giant narrowed losses on its "moon shots." Net profit climbed 27 percent to $5.1 billion. "We had a great third … More »

  • Amazon loves its Fresh grocery service, calls it a ‘key part’ of the business
    Amazon loves its Fresh grocery service, calls it a ‘key part’ of the business Business Insider - 16 minutes ago

    Grocery Outlet on Instagram Amazon is happy with … Continued The post Amazon loves its Fresh grocery service, calls it a ‘key part’ of the business appeared first on Business Insider. … More »

  • Amazon forecast for holiday season disappoints as investment rises Reuters - 19 minutes ago

    Amazon is racing to ship packages as quickly as possible by building out its own delivery system. It is making heavy U.S. investments as well as pouring funds into foreign markets, and it also is building out its home electronics and video … More »

  • GE in discussion with Baker Hughes on potential partnerships
    GE in discussion with Baker Hughes on potential partnerships Reuters - 20 minutes ago

    Baker Hughes shares, which had jumped nearly 14 percent in extended trading after the Wall Street Journal had reported that General Electric was in talks to buy the company, pared some gains and were up about 7 percent. The Journal had reported … More »

  • Tokyo stocks open higher AFP - 26 minutes ago

    Tokyo stocks opened higher on Friday as a weak yen triggered buying of exporter shares. The benchmark Nikkei 225 index rose 0.65 percent, or 111.97 points, to 17,448.39 in the first few minutes of trading. ... … More »

  • Singapore's UOB profit falls 7.8 percent; bad debt charges jump
    Singapore's UOB profit falls 7.8 percent; bad debt charges jump Reuters - 28 minutes ago

    Singapore's United Overseas Bank (UOBH.SI) posted a 7.8 percent drop in third-quarter net profit on Friday, hurt by a jump in bad debt charges due to losses from its exposure to the oil and gas sector. Singapore banks are facing mounting risks as … More »

  • UOB Third-Quarter Profit Falls 7.8% as Soured Assets Rise (1) Bloomberg - 28 minutes ago

    While net interest income was little changed, provisions for bad debts increased by almost 16 percent to S$185 million, UOB said. UOB also posted a 33 percent jump in nonperforming assets to S$3.6 billion as of end September, compared with a year … More »

  • Eyeing a brighter future of O&G at GE's iCenter Business Times - 35 minutes ago

    With the declining oil prices, players in the oil and gas industry have been forced to re-evaluate the way they run their businesses. Operational efficiency is especially crucial to O&G companies. GE Oil & Gas’ iCenters provide digital industrial … More »

  • AMP Faces A$668 Million Charge as Insurance Woes Hit Profit (2) Bloomberg - 39 minutes ago

    “We’ve seen consistent deterioration in the insurance sector over the course of 2016,” AMP Chief Executive Officer Craig Meller said in the statement. Insurers’ revenue fell 36 percent to A$28 billion in the year to June 30 from a year earlier, … More »

  • Lumentum reports 1Q loss Associated Press - 48 minutes ago

    The Milpitas, California-based company said it had a loss of 6 cents per share. Earnings, adjusted for one-time gains and costs, were 49 cents per share. The results surpassed Wall Street expectations. ... … More »

  • Japan’s Consumer Prices Keep Falling, Household Spending Slips Bloomberg - 54 minutes ago

    Consumer prices excluding fresh food, the BOJ’s primary gauge of inflation, dropped 0.5 percent in September from a year earlier (forecast -0.5 percent). Household spending fell 2.1 percent from a year earlier (forecast -2.7 percent). … More »

  • Deal struck for world's biggest marine reserve in Antarctica
    Deal struck for world's biggest marine reserve in Antarctica AFP News - 57 minutes ago

    The world's largest marine reserve aimed at protecting the pristine wilderness of Antarctica will be created after agreement was finally reached Friday with Russia dropping its long-held opposition. The deal, sealed by the Conservation of Antarctic … More »

  • CenturyLink nears deal to merge with Level 3 - sources Reuters - 59 minutes ago

    CenturyLink Inc (CTL.N) and Level 3 Communications (LVLT.N) are in advanced talks to merge, according to people familiar with the matter, in a deal that would create an enterprise telecommunications player worth more than $50 billion, including … More »

  • Forex Trading Singapore: How The Bid-Ask Spread Works?
    Forex Trading Singapore: How The Bid-Ask Spread Works? DollarsAndSense.sg - 1 hour 5 minutes ago

    It's easy to understand once you know the basics. The post Forex Trading Singapore: How The Bid-Ask Spread Works? appeared first on DollarsAndSense.sg. … More »

  • Crisis Gauge Flags China Cash Squeeze Followed by Growth Hit (1) Bloomberg - 1 hour 7 minutes ago

    Bond investors are preparing to benefit from the slower economic growth that may result. “This is a signal in the market that swap traders are readying for tighter liquidity as the government tries to prevent a property bubble,” said Iris Pang, … More »

  • GE explores acquisition of Baker Hughes - source Reuters - 1 hour 11 minutes ago

    It is not clear whether Baker Hughes will engage further in deal talks, the person told Reuters. Baker Hughes, which has a market capitalisation of $23.1 billion (18.99 billion pounds), declined to comment. Baker Hughes shares were up 13.7 percent … More »

  • Yen Weakness Seen Boosting Japan Stocks as Asia Pauses on Fed Bloomberg - 1 hour 11 minutes ago

    Amazon.com Inc. fell after warning it may not make any money in the holiday quarter. Nikkei 225 Stock Average futures climbed 0.6 percent in Osaka and the benchmark share index is on course for its best month since July, as the yen weakened above … More »

  • OSI posts 1Q profit Associated Press - 1 hour 14 minutes ago

    The Hawthorne, California-based company said it had net income of 3 cents per share. Earnings, adjusted for restructuring costs and amortization costs, were 44 cents per share. The airport security and ... … More »

  • Macquarie Group Profit Beats Estimates on Asset Sales (1) Bloomberg - 1 hour 22 minutes ago

    Chief Executive Officer Nicholas Moore has focused in recent years on expanding the bank’s stable businesses such as lending and leasing to shield earnings from the cyclical nature of investment banking fees. Macquarie is also benefiting as … More »

  • Amgen tops Street 3rd-quarter profit and revenue forecasts Associated Press - 1 hour 23 minutes ago

    Amgen Inc. on Thursday reported third-quarter net income of $2.02 billion. The Thousand Oaks, California-based company said it had profit of $2.68 per share. Earnings, adjusted for non-recurring costs, ... … More »

  • SPS Commerce tops Street 3Q forecasts Associated Press - 1 hour 30 minutes ago

    On a per-share basis, the Minneapolis-based company said it had profit of 14 cents. Earnings, adjusted for one-time gains and costs, were 27 cents per share. The results exceeded Wall Street expectations. ... … More »

  • Digi International beats 4Q profit forecasts Associated Press - 1 hour 34 minutes ago

    On a per-share basis, the Minnetonka, Minnesota-based company said it had profit of 14 cents. The results beat Wall Street expectations. The average estimate of three analysts surveyed by Zacks Investment ... … More »

  • Flextronics meets 2Q profit forecasts Associated Press - 1 hour 42 minutes ago

    The Singapore-based company said it had a loss of less than 1 cent on a per-share basis. Earnings, adjusted for one-time gains and costs, were 28 cents per share. The results matched Wall Street expectations. ... … More »

  • Google parent Alphabet beats on revenue, earnings; sets buyback
    Google parent Alphabet beats on revenue, earnings; sets buyback Reuters - 1 hour 47 minutes ago

    Alphabet, along with Facebook Inc, dominates the fast-growing mobile advertising market. Shares of Alphabet, the world's No. 2 company by market value, were up 1.6 percent in after-hours trading. The company posted third-quarter adjusted earnings … More »

  • Teligent reports 3Q loss Associated Press - 1 hour 48 minutes ago

    On a per-share basis, the Buena, New Jersey-based company said it had a loss of 5 cents. Earnings, adjusted for non-recurring costs and stock option expense, came to 1 cent per share. The results surpassed ... … More »

Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
to view quotes in your portfolios.


    Market Data

    • Currencies
      NamePriceChange% Chg
    • Commodities
      NamePriceChange% Chg
    • Bonds
      TreasuryYield (%)Yield Change