Japan's Faith in Strong Dollar Policy Is Laughable

Comments such as those made by Japanese Finance Minister Kaoru Yosano as reported by Blooomberg on the subject of the attractiveness of long-term U.S. debt make you wonder where the Pacific island nation might be 60 years from now, independence-wise, as they seem to have made little progress since the end of World War II.

In preparation for this past weekend's G8 meeting, Yosano noted that Japan has "complete trust in the fact that the U.S. views its strong-dollar policy as fundamental", going on to emphasize the point by characterizing said trust as being "absolutely unshakable", adding the final punctuation that they "have complete faith in U.S. economic and fiscal policy".

It's not clear if this statement is more naive than it is laughable - it is certainly as laughable as the notion that we Americans have a strong-dollar policy at all.

Recall that, for years, U.S. Treasury Secretaries (with the notable exception of Paul O'Neill who, not coincidentally, didn't last very long) have been parroting the official government line that "a strong dollar policy is in the national interest". This belies the reality that actions taken at all levels of government since the bursting of the Nasdaq bubble almost ten years ago, particularly the actions of the central bank, make plain that no one stateside really cares about the value of the dollar.

Naturally, as we all learned very painfully last year, when oil prices get too high there is an outpouring of concern about the value of the dollar, emotions that are quickly overwhelmed by the ripple effect of a lower dollar when nearly all the world's business arrangements are transacted in greenbacks.

That has been a fundamental part of the problem with the global economy for some time now, a fact the Mr. Yosano appears to be blissfully unaware of along with more recent developments like nations such as China, Brazil, Russia, and others who are now loudly objecting to the status quo of dollar hegemony.

Surely, some policymakers in Japan are now mindful of the fact that they've hitched their wagon to what is now clearly the wrong horse in the 21st century. You'd think that you'd at least hear rumblings of discontent along with the rest of the world rather than blind obedience.

Granted, they must now feel a bit like Donald Trump's bankers where it is becoming clear that it would be much more painful to let nature take its course, opting instead to do what they can to help make things go along as they have been for years, but at some point, you have to say enough is enough.

Neither the Donald's business model, nor that of the U.S. is sustainable.

Back in the 1980s, when Japan was at their post-WWII peak, the U.S. was derided for not looking past the next quarter while the Japanese had long-term plans.

What's their long-term plan for business relations with the U.S.?

To hope and pray that Americans will continue to buy Toyotas (TM) and Hondas (HMC) well into the 22nd century?

Japan has one of the largest economies in the world but, apparently, one of the tiniest backbones. Japan's dependence on U.S. military power to secure energy supplies and a deference for no military of their own makes them beholden to the whims of the U.S. twenty years after their economic miracle proved to be little more than a U.S.-style bursting asset bubble.

At what point do the Japanese assert their independence again?

They ought to at least start asking a few questions...

Comments

[Moon Kil Woong:]

A country that has had no party change after decades of a stalled economy is unlikely to lead any advancement for change. Besides it's moribund economy, the author is right that is remains heavily dependent on the US. A weak dollar is not good for japan, especially since ithas had to contend with an overly strong Yen for a long time.

Whereas with China we often complain that it has embraced a weak RMB strategy, Japan could easily contend the US has embraced a weak dollar policy. They would be absolutely correct. Behind the US's facade of a strong dollar there has really been nothing. The US continues it's path to devalue its dollar and embrace it's unalterable slide in value.

To do otherwise would mean to recognize its huge deficit problems and embark on a austerity program like never seen before. In such a case, Asia would have to learn to stand on its own. Something it has not been too keen on doing for the past 6 decades.

Jun 15 06:48 AM

[DONE_SONZ:]

The US continues it's path to devalue its dollar and embrace it's unalterable slide in value.

To do otherwise would mean to recognize its huge deficit problems---G8----Chapter 11 hearing?!

On Jun 15 06:48 AM Moon Kil Woong wrote:

> A country that has had no party change after decades of a stalled
> economy is unlikely to lead any advancement for change. Besides it's
> moribund economy, the author is right that is remains heavily dependent
> on the US. A weak dollar is not good for japan, especially since
> ithas had to contend with an overly strong Yen for a long time.
>
>
> Whereas with China we often complain that it has embraced a weak
> RMB strategy, Japan could easily contend the US has embraced a weak
> dollar policy. They would be absolutely correct. Behind the US's
> facade of a strong dollar there has really been nothing. The US continues
> it's path to devalue its dollar and embrace it's unalterable slide
> in value.
>
> To do otherwise would mean to recognize its huge deficit problems
> and embark on a austerity program like never seen before. In such
> a case, Asia would have to learn to stand on its own. Something it
> has not been too keen on doing for the past 6 decades.

Jun 15 08:12 AM

[Leftfield:]

I'm not sure how much words mean by leaders. Japan is issuing some debt in Yen, I believe.
Interesting times. Japan and to some extent, Germany have kept rather quiet since WWII. Japan has had bad times and an aging demographic and so may defer outwardly to the US yet.
Times are changing, though. I think the constant is that the banksters have hobbled the US and that has been their major goal. Listening to the once-mighty, now craven supplicant industrialists from GM talk of the partnership of government and industry shows how the real power is in Wall St. with their DC handmaidens. Stupid trade and stupid policies have spent our real power on misallocation, military and debt. Don't assume the US won't act like Japan if we're going through our economic version of WWII and come out stripped of reserve "currency" status.

Jun 15 10:13 AM

[LilBob:]

To me the future of the dollar really comes down to the future of energy production. To me the state of California is telling in this respect. A recent article in the San Francisco Chronicle mentioned that California's goal of producing one third of it's energy from renewable resources by 2020 may be more feasible than originally thought.

www.sfgate.com/cgi-bin...

Assuming this source is correct, then the future of the dollar may not be quite as bleak as some think. If California of all places can manage one third of their energy from renewable resources then any state can do it, and eventually the US grain belt and rust belt states could become massive suppliers of wind, geothermal and solar energy.

All we really need is to get past this whole "plug-in," hybrid concept for motor vehicles-which we don't have a sufficient power grid to support and probably never will-and focus on powering homes and businesses with renewable energy sources and just manage to get our motor vehicles up to the 35 mpg standard that the Obama administration is proposing our trade deficit due to energy costs would change drastically and the nation would be stronger economically. What would be really great right now would be if Chrysler-with their new FIAT partnership was to focus on building very simple fuel-efficient cars-just like Iacocca had the company do to pull themselves out of bankruptcy the last time-and stay away from overpowered barges-like they were building right before they went bankrupt this time and the last time.

Regarding the Japanese (man I am rambling all around today) it will be interesting to see if they revive their small-scar strategies from the 80s also-to see if they can pull themselves out of their sales slump and save themselves from the "Chrysler trap."

Jun 15 10:44 AM

[Mad Hedge F...:]

They've got their own problems. You know things are bad when traders celebrate a Q1 GDP of minus 4%, better than the 4.4% that had been forecast, but still the worst in history. The main causes were a 26% decline in exports and a strong yen, which diluted foreign profits. Apparently, people don’t rush out and buy a new Lexus when they lose their jobs. Many economists are hoping for a recovery when the government’s $160 billion stimulus package hits seriously pared back inventories. However, global asset allocators are facing a larger quandary. What is Japan’s role in the “new” world? It is not an emerging market, nor is it Europe or the US. It is on the doorstep of the world’s worst demographic problem, and its labor is not exactly cheap. But chastened by its own financial crisis that started 20 years ago, it has some of the few global banks left standing, as well as some world beating companies, and a great neighborhood customer in China. As American power declines, will it fall into the Chinese orbit? Maybe country allocations don’t matter anymore. Until either the Japanese or I figure this out, I’d rather stand aside. This is coming from someone who lived there ten years

Jun 15 10:46 AM

[CautiousInv...:]

The Japanese comments should be taken in the same context as those offered by Russian Finance Minister Kudrin.

Japan is simply trying to protect the value of its dollar holdings by talking up the dollar. It knows as well as anybody that the dollar has been declining against the yen.

Unlike China and Brazil, Japan is not declaring its intentions.

Jun 15 04:54 PM

[Old Trader:]

Cautious,

I think you're spot on. In addition, since Japan's an export-driven economy, their additional "jawboning" of the dollar works to their advantage, if the dollar strengthens vis a vis the yen.


On Jun 15 04:54 PM CautiousInvestor wrote:

> The Japanese comments should be taken in the same context as those
> offered by Russian Finance Minister Kudrin.
>
> Japan is simply trying to protect the value of its dollar holdings
> by talking up the dollar. It knows as well as anybody that the dollar
> has been declining against the yen.
>
> Unlike China and Brazil, Japan is not declaring its intentions.<br/>

Jun 15 06:10 PM

[tuj:]

Right, Japan should want to take steps to devalue the Yen relative to the USD so they can continue their exports' competitiveness. And certainly the US is still (for now) the major consumption base.

Jun 16 07:06 AM