Yen won’t be moved by the ‘90s nostalgia

With Gen Z bringing
back everything from “Friends” to cassette tapes, and Will Smith the most talked-about celebrity of the year, it’s tempting to think everything ‘90s is in right now. In financial markets this week, analogies with 1998 have become ubiquitous as the yen has buckled, increasing speculation Japan will have to intervene to strengthen its currency for the first time since Madonna topped the charts with “Frozen.”
Bank of Japan Governor Haruhiko Kuroda, then a senior Finance Ministry official involved in coordinating intervention, might be among those feeling wistful. But 2022 is no 1998. Yes, the yen is trading near 135 to the dollar. In today’s Japan, that weakness isn’t derived from a broken banking industry, but a lax monetary policy relative to the US. While Tokyo can intervene, it’s likely to be a relatively ineffectual solo act to buy time rather than anything that would drive a sustained yen rally.
The intervention to prop up the yen back in 1998 was historic because Washington lent its clout to the endeavor, taking the rare step of selling dollars in June that year. But the assist to an ally was part of a broader game. As dire as Japan’s situation had become with the nation beset by a banking crisis, its travails were just one component in US thinking. China and stability of American partners throughout Asia figured prominently in the calculus of President Bill Clinton’s administration.
Clinton was preparing for a trip to China and feared Beijing would weaken its own currency during or around the time of his visit. The Asian financial crisis was still fresh. Another wave of devaluations would have been devastating for the region — and risked undercutting the long boom the US was enjoying.
China’s central bank chief was pleased with the outcome. Washington’s discomfort with the yen’s free fall eased pressure on Beijing to protect its export competitiveness by weakening the yuan. “We were very happy,” Dai Xianglong, governor of the People’s Bank of China, said after meeting then-Treasury Secretary Robert Rubin in Beijing shortly after the intervention.
The idea that Joe Biden’s team would dump the dollar in ways that benefit China is scarcely conceivable today. Inflation in the US was then contained; now consumer prices are surging. Actively pushing the dollar down wouldn’t be a great headline in the current environment.
Even Rubin, who presided over the intervention and was a crucial player in global financial diplomacy, was skeptical that market maneuvers by governments could set the long term trajectory of a currency. “What I have said consistently and is my strongly held view is that, ultimately, currencies follow fundamentals,” Rubin told reporters on June 18, a day after the dollar sales, according to a Bloomberg News profile at the time.
“That is going to be true in Japan as well. And Japan has to deal with fundamental problems.” And problems Japan had. The government at the time was on the rocks, in the midst of a banking crisis after the collapse of Yamaichi Securities and other financial firms the previous year. The government of Prime Minister Ryutaro Hashimoto was fixed on fiscal consolidation, lifting the country’s sales tax and depressing domestic demand.

—Bloomberg