At their latest meeting in Kuala Lumpur, finance ministers from the Association of Southeast Asian Nations voiced deep concern over a weak yen.
They wound up the meeting April 8 with a communique, voicing concern over the possibility that the yen’s weakness against the dollar might have a negative impact on sustainable ASEAN region growth.
A Finance Ministry official then declared that Japan intends to keep the yen from falling further. His remark was met with skepticism, however, and as some observers noted, the comment was taken as an indication he was concerned only about the yen’s excessively fast fall, instead of its adverse impact on Southeast Asian economies.
One of the causes of the 1997 Asian currency crisis was Japan’s attempt to guide the yen lower without behind-the-scenes support from its Asian neighbors. Other parts of Asia failed to cope with the rapid depreciation of the yen and were thrown into a currency crisis. After reflecting on the experience, Japan then offered the region the Miyazawa Plan, a $30 billion financial assistance package.
It is believed the yen’s current weakness can be explained to a certain extent by these previous failures, and if we were to assume that other Asian economies place priority on the recovery of the Japanese economy, then these economies should be able to accept the yen’s current weakness as well, the thinking goes.
However, Japan’s exchange rate policy is governed by a mix of interest-rate and fiscal policies, and it is not possible to guide the rate in a simple way. In addition, political credibility is also required to pursue this policy.
In Japan, political functions have been suspended for all practical purposes as the Liberal Democratic Party continues its presidential race.
As the handling of the textbook controversy clearly shows, the credibility of the government has deteriorated. At such a time, Japan should not try to take on exchange rate policy, especially if it is clear that other Asian economies remain concerned about a further fall of the yen.
The remark by the Finance Ministry official may merely have been aimed at reducing apprehension in Southeast Asia.
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