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At the G7 conference of finance ministers and central bank chiefs that was held in Washington over the weekend, the delegates from other member nations agreed to adopt a read-between-the-lines statement in which the world’s top financial managers shared their worry over the recent sharp rise of the yen. This official expression of joint concern over the potential dan
gers entailed in the yen’s rise was reciprocated by a promise from Japan to implement business-stimulating measures de
signed to put the economy on the path of stable growth driven by domestic demand.

Recent government reports note the Japanese economy is showing signs of an upturn. Gross domestic product, for example, recorded positive growth in both the first and second quarters of this year. This, however, encouraged a pre-emptive buying of the yen on foreign exchange markets, causing the yen’s value to soar. Ironically, the rising yen drew only a negative reaction from the stock markets, which began to fall.

Both developments posed a dilemma for the Japanese government and the central bank, which feared that these hostile markets could nip the nascent economic recovery in the bud. But Japan’s effort to sound out the United States and other G7 economic powers on the possibility of coordinated market intervention backfired. The reason was that the latest rise in the yen was generally regarded as Japan’s own problem. The U.S. therefore persisted in thinking that Japan should first take substantial measures to relax the money supply before it talked about a coordinated market intervention.

Japan’s scenario of containing the recent rise in the yen through coordinated action, however, did not receive its death stroke from any other nation, but from within. At a meeting of its policymaking board on the eve of the Washington conference, the BOJ decided to leave its monetary policy unchanged, that is, to proceed without further relaxing the money supply. The decision dealt a blow above all to the Finance Ministry, which had drawn up the scenario of securing U.S. agreement to coordinated intervention premised on Japan’s implementation of new business-stimulating measures.

That BOJ decision, betraying a gap in the respective positions of the central bank and the Finance Ministry, served to send the yen’s value up and stock prices down. Obviously, this domestic wrangling put the Japanese delegates to the Washington meeting in an awkward position.

Considering all this, the outcome of the conference should be welcomed. The joint statement says in part, “We shared Japan’s concern about the potential impact of the yen’s appreciation for the Japanese economy … (and) we welcomed indications by the Japanese authorities that policies would be conducted appropriately in view of this potential impact.”

Admittedly, the statement fell short of referring to coordinated action to contain the yen’s rise. But the expression of “concern about the potential impact of the yen’s appreciation” does imply that the G7 economies might take joint action to contain the yen’s appreciation if its value seems likely to soar above the current high level.

The other G7 nations see the Japanese economy showing signs of recovery, thanks to massive fiscal spending and super-low interest rates. At the same time, the view prevails that there is no prospect of a sustained recovery supported by expansion of domestic demand. In response to this widely held belief, the Japanese delegates promised to continue implementing stimulative measures until a domestic demand-oriented growth takes firm root.

To keep its pledge, the government will have to compile a large second supplementary budget despite its fiscal difficulties. Japan also will have to confront mounting international pressures to increase the money supply. In particular, the BOJ will have to leave its currency interventions “unsterilized,” meaning that the yen fund spent to buy the dollar will not be absorbed through the purchase of government bonds.

In the midst of the yen’s basic shift toward appreciation, the Washington conference imposed on Japan the difficult task of realizing a sustained growth based mainly on expanding domestic demand. It will be an uphill battle. With the U.S. presidential election scheduled for next autumn, for instance, Washington will become even more sensitive to any increase in Japan’s exports to the U.S., which is one important reason why Washington basically favors the yen’s appreciation. The coming months appear likely to be even more difficult for Japan in terms of attaining the twin goals of keeping the yen’s value at an appropriate level and of ensuring sustained growth for the economy.

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