Policymakers around the world have been scrambling to assess and control the damage from the Brexit vote and nowhere has this task been more challenging than the Land of the Rising Sun. Frightened investors looking for safe haven assets sent the yen into the stratosphere on Friday, and Japanese officials now say they might intervene to bring the currency back to earth. Reuters reports:
The yen retreated further from more than two-year highs against the dollar on Friday, after Japanese authorities hinted at the possibility of intervention in the currency market.
The dollar traded at 103.08 yen JPY=, up around 2.8 percent on the day, compared with 102.75 before a slew of comments from senior Japanese officials.
Japanese Finance Minister Taro Aso said Prime Minister Shinzo Abe had instructed him to cooperate with the Bank of Japan and closely consult with Group of Seven partners, in responding to market moves following Britain’s vote to leave the European Union.
On Friday, Japan’s stock market fell dramatically due to fears that a stronger currency would hurt the country’s sputtering exports. That was bad news for Prime Minister Shinzo Abe, who has been trying to prop up exports after five years of Japan running a trade deficit. Earlier this year Tokyo appeared to be having some success, but officials reported an increased trade deficit again in May. Prior to 2011, Japan had consistently recorded a trade surplus for over thirty years.
Policymakers around the world have a habit of trying to replicate Tokyo’s strategies. In recent years, Tokyo has tried a number of unorthodox policies—negative interest rates, for example—which are becoming increasingly tempting as governments around the world struggle to get growth back on track. But Japan’s own economy remains in a fragile state despite the flashy policy ideas, and polls show declining faith in Abenomics and in the prime minister himself.
Nevertheless, the WSJ reports, Abe’s LDP is expected to win upcoming elections because its main opponent, the Democratic Party, doesn’t have any alternative economic proposals. Still, if the yen continues to strengthen ahead of July 10th elections, look for pressure on Abe and the LDP to increase.