When Bank of Japan Gov. Haruhiko Kuroda said in Tokyo last week the yen has weakened enough, his key audience was 11,000 km away in Washington.
The currency has rebounded about 2 percent from a 13-year low as Kuroda said on June 10 that the currency is “very” weak. The gains did not come soon enough to stop fellow Democrats blocking President Barack Obama’s efforts to fast-track a trade deal between 12 nations across the Pacific Ocean two days later.
“When the yen is weakening rapidly trade talks don’t go smoothly,” said Toru Yamamoto, the chief strategist at Daiwa Securities Co., one of the primary dealers obliged to bid at government auctions. Kuroda opted for verbal intervention because the pact “is one of the pillars of Japan’s growth strategy so it’s very important for restoring fiscal health.”
Kuroda’s new stance raises a potential hurdle to the additional monetary easing that economists have been projecting to help the BOJ achieve its 2 percent inflation target. The Trans-Pacific Partnership is a key part of Prime Minister Shinzo Abe’s plans to end Japan’s decade of deflationary drift and cut its borrowing. In a speech to the U.S. Congress in April, Abe directly urged lawmakers to seal the trade deal.
“A weaker yen will make it harder for Trans-Pacific Partnership laws to pass U.S. Congress,” said Robert Feldman, the chief economist at Morgan Stanley MUFG Securities Co. “It’s important for the Japanese government to take spontaneous actions to prevent further weakening of the yen.”
Feldman said Kuroda’s remarks were a kind of “verbal intervention” to prevent the yen from declining further. Takatoshi Ito, a professor at Columbia University, also said in a June 5 interview that it’s possible the central government will adopt currency policy that will smooth the passage of TPP laws.
The yen fell to 125.86 per dollar on June 5, the lowest since 2002.
“If the yen abruptly plunges to 130 from 125, U.S. lawmakers might make a fuss,” said Ito, who was a deputy to Kuroda in 1999 to 2001, when his boss was in charge of Japan’s currency policy. “It’s not desirable for Japan and other countries that provisions which prohibit any trade pacts with nations manipulating their currency are attached.”
Kuroda said in remarks to the Diet last week that the yen is unlikely to weaken further in real effective terms.
The comments underscore the view that policymakers in Japan are not seeking a further depreciation in the yen. The economy and finance ministers have expressed concern about “abrupt” and “rough” moves in foreign exchange markets.
Chief Cabinet Secretary Yoshihide Suga said on Saturday the trade agreement is vital to the “third Arrow” of Abe’s economic program.
Japan’s participation would boost its gross domestic product by 0.66 percentage point, or ¥3.2 trillion ($26 billion), if it abolished all tariffs, according to a government estimate in 2013.
Japan’s debt to gross domestic product ratio was 230 percent in 2014, the worst among the Group of Seven nations, according to government data. Even so, benchmark 10-year government bonds yield 0.505 percent, only about a quarter of similar maturity U.S. Treasuries, helping cap the government’s borrowing costs.
“This is going to be a decisive year for both Japan and the U.S. in sealing TPP,” Daiwa’s Yamamoto said. “TPP is important for the bond market’s stability because higher economic growth could help with fiscal rebuilding without relying only on tax increases and spending cuts.”