Trump's 'Japan Is back' rhetoric signals campaign focus on alleged currency manipulation

by Finbarr Flynn and Kevin Buckland


Donald Trump’s claim that “Japan is back” isn’t the dominant view among economists. Apparently, the Bank of Japan agrees with his assessment.

Gov. Haruhiko Kuroda held the central bank’s unprecedented easing unchanged at the end of last week, even as policymakers put back the time frame for achieving a target of 2 percent inflation. Trump showed his awe at witnessing “the biggest ships I have ever seen” loaded with Japanese cars in Los Angeles because of the weaker yen. The BOJ has said it was optimistic rising wages would sustain a “virtuous economic cycle” as rebounding fuel prices push up inflationary expectations.

The monetary authority skirted the issue of whether its stimulus policies were responsible for the 18 percent drop in the yen over the past two years that has helped drive profit growth at exporters like Toyota Motor Corp. Given tensions at the Group of 20 meeting in September, policymakers are likely to be acutely aware of how more aggressive easing and an even weaker currency would play out during a U.S. election year.

“The BOJ’s aggressive monetary stimulus appears to be bearing fruit,” said Joseph Capurso, a Sydney-based strategist at Commonwealth Bank of Australia. “The labor market is tight and Kuroda’s favorite measure of core inflation — excluding energy — is trending higher. That is why the BOJ did not ease policy this time, and the risks of further easing in coming months are diminishing.”

The BOJ refrained on Friday from stepping up its policy of expanding the monetary base at an annual pace of ¥80 trillion ($663 billion). While Japan’s economy contracted an annualized 1.2 percent in the second quarter from three months earlier, industrial production increased in September and unemployment is near a 1997 low. Consumer prices excluding fresh food and energy costs rose 0.9 percent from a year earlier in September, after a 0.8 percent gain in August.

The monetary authority postponed its time frame for reaching its inflation target to around the six months through March 2017. For months, most private economists have said the BOJ’s goal is unrealistic.

“The BOJ risked putting itself behind the curve by not acting,” said Daiju Aoki, an economist at UBS Securities Japan Co. He was one of 16 of 36 analysts surveyed by Bloomberg that had expected the BOJ to expand stimulus on Friday. Eight had forecast further easing at a later date and 12 saw no prospect of any change in the foreseeable future.

Debate about currency wars has heated up after China devalued the yuan in August and other global central banks eased policy while the Federal Reserve moves toward a rate increase. U.S. Treasury Secretary Jacob Lew, who spoke with Finance Minister Taro Aso at a Group of Seven gathering in May, said countries shouldn’t target exchange rates for competitive purposes.

“The upcoming election is a little worrying for Japanese leaders,” said Koichi Nakano, a professor of politics at Sophia University in Tokyo. Trump is influencing where candidates “position themselves with policies,” he said.

Prime Minister Shinzo Abe is credited with weakening the yen after campaigning for the post in 2012 by saying he’d do “whatever it takes” to depreciate the currency, including persuading the BOJ to help him. The Japanese currency has dropped the most against the dollar in Asia apart from the Malaysian ringgit in the past two years.

“I don’t think the Bank of Japan nor the Japanese government want to appear to be trying to depreciate the yen further,” said Takuji Okubo, the chief economist at Japan Macro Advisors in Tokyo. “In real terms the Japanese yen is as weak as it was back in the seventies.”

Japanese companies including Toyota have enjoyed record profits under Abe, as overseas sales boosted earnings. Trump on the campaign trail has bemoaned automobile imports from Japan, while boasting that he will bring jobs back to the U.S. from Asia’s two largest economies.

“I don’t know if you know but Japan is back, they’re doing this monetary manipulation, their currency manipulation, big league,” Trump told an audience in Iowa last month.

The BOJ’s decision comes after the U.S. Federal Reserve indicated last week that December is still a possibility for its first rate increase since 2006, which would boost global demand for the dollar.

“My general thesis is that we are in the middle of a currency war,” according to David Woo, the head of global rates and foreign exchange research at Bank of America Corp. “Trump is talking about China and Japan stealing jobs from the U.S., so from that kind of rhetoric it is very clear going to the presidential season next year this is going to be a huge subject.”

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