A recent U.S. Treasury Department report on foreign exchange policies of America's major trading partners — which named Japan along with China and others on the list of economies whose currency policy practices need close monitoring — should serve as a reminder that relying on the weak yen to bolster the profits of Japanese firms and drive its economy may not only be unsustainable for much longer but can also be harmful in the long run.
Whether Japan's currency practices indeed deserve to be on the U.S. government's watch list might need to be weighed against the political factors behind the report, issued at the end of last month as the campaign heats up for November's presidential election, where trade hawks tend to appeal to American voters, and as President Barack Obama needs to win the cooperation of the Republican-controlled Congress on sensitive policy issues in his final year in office. But the report comes as yet another signal that Washington appears increasingly intolerant of the yen's weakness against the dollar under Prime Minister Shinzo Abe's watch.
Whether it was intended as such, it is undeniable that the "unprecedented" monetary easing by the Bank of Japan since 2013 — touted as the "first arrow" of Abenomics — drove the yen's value down against other major currencies, pushed up the profits of major Japanese businesses to record levels by inflating their export earnings in yen terms, and led to a surge in share prices on the Tokyo market. And as the BOJ's monetary stimulus program entered its fourth year and the central bank even tested the negative interest rate policy, the yen has been facing steep upward pressure since January, clouding the earnings prospect of the big firms — already thrown in doubt by growing uncertainties over global growth — and pushing down the stock market.