Too much money

The strength of the yen is a good index of global financial disorder. On that basis, the Japanese currency should be rising only slowly, if at all. Upward pressure from low inflation ought to be countered by worries about slow growth — GDP is the same as it was six years ago — and Japan’s fiscal deficit of 10 per cent of GDP. But, the yen has shot up nine per cent since April on a trade-weighted basis, prompting the authorities to intervene in forex markets again on Monday. The problem for Tokyo is the yen looks attractive, considering the US Federal Reserve’s dollar-hostile monetary policy and the American willingness to borrow from foreigners. Japan’s fiscal deficit is financed almost entirely domestically. Meanwhile, the euro looks bad to traders, given the long and uncertain road out of an almost two-year-old crisis.

Will the Japanese intervention work? The answer depends on what counts as success. If the goal is to keep the yen from durably rising above 75 to the dollar, the latest move, which follows the one in August, should do the trick for a while. The dollar climbed from 75 to 78 yen on Monday. But, the effects are likely to be reversed just as fast as the August intervention, in about a week. If the government wants to eliminate the upward pressure on the yen, it will need to move on a much larger scale.

Japan is unwilling to be a pioneer in abandoning the consensus view among rich countries on exchange rates — they should basically float freely. But, its unilateral action, coming less than a week before a G20 summit which could have endorsed a co-ordinated effort to stabilise currencies, shows this consensus is fraying badly. Japan is right not to expect the global powers to agree to anything substantial, not when the Europeans are divided and the US is unconcerned about its international position.

It is hard to blame Japan for putting its economic self-interest ahead of global solidarity. But, the decision to go it alone can only add to international financial tensions.