Yen’s plunge raising blood pressures in Asia 

Episodes of extreme yen weakness don’t tend to go well for Asia. In the late 1990s, early 2010s and today, a sliding yen often proves to be even more disruptive than gyrations in the US dollar.

This owes much to Japan’s role as the top creditor nation. Because short-term Japanese interest rates have been near zero for 23 years now, investors turn to the yen to fund higher-yielding bets around the globe.

Proceeds go into more lucrative wagers on Indian and Indonesian stocks, New Zealand real estate, South African currency futures, South Korean debt, Thai infrastructure projects, US Treasury securities, cryptocurrencies, you name it. The catch is that sudden yen U-turns force investors to exit these “carry trades,” pulling the rug out from under markets everywhere.

Yet this time, “things really are different.” These four most dangerous words in economics can be seen in recent warnings from a who’s-who of global economists known for predicting big trends in global economics.

Case in point: Jim O’Neill of BRICs fame. In 2001, back in the economist’s Goldman Sachs day, O’Neill popularized the idea that Brazil, Russia, India and China would change all we know about trade, finance and geopolitics. 

These days, O’Neill worries the yen’s 20% decline versus the dollar this year is about to accelerate to the 150 level (from nearly 139 yen now). A drop to that level, O’Neill says, might nudge China to devalue, too. President Xi Jinping, O’Neill warns, may interpret yen dynamics as an “unfair competitive advantage” with “perfectly obvious” parallels to the 1997 crisis.

Nouriel Roubini worries, too. The New York University economist is known for having predicted the 2008 Lehman Brothers crisis. He is known, too, for dismissing Bitcoin and other cryptocurrencies as the “biggest bubble in human history.” 

Now, Roubini warns that the yen going “well above 140” will force the Bank of Japan to “change policy” on efforts to keep bond yields at, or below, zero. Such a change in strategy, Roubini notes, is the last thing Asia needs. 

That’s as true for South Korea as anywhere. Asia’s fourth-biggest economy was the first major power in the region to recover from the Covid-19 era. The Bank of Korea was the first major monetary authority to begin raising rates back in August 2021. 

Last month, though, Korean exports increased at their slowest pace in two-and-a-half years. That 5.4% rise from a year earlier is an ominous sign for the global financial system. With its large and open economy, Korea is one of the world economy’s most reliable early-warning systems. 

An even weaker yen — and declining yuan — would raise the economic temperature in Seoul and beyond. It might change the BOK’s calculus for further rate hikes. It presents difficult challenges for newish President Yoon Suk-yeol as intensifying headwinds head Korea’s way. 

Complicating things, global inflation is really heating up. The 9.1% pace of US consumer price increases, the fastest since 1981, adds to pressure on Federal Reserve officials to accelerate tightening moves. Some top Fed officials suggest a one-percentage-point step is an option later this month. It would be the biggest hike since the early 1990s. 

Asia, in fact, is on the verge of a “reverse currency war.” This features governments strengthening exchange rates so they import less inflation via record oil and food prices. Or “competitive appreciation,” as Harvard University’s Jeffrey Frankel calls it. 

Though Korea is on much firmer footing, the same can’t be said of fellow 1997 crisis mates Indonesia or Thailand. India, the Philippines, Vietnam and others are in harm’s way as exports stall and risks of “stagflation” increase. 

As exports grow more erratic, Yoon’s government must accelerate efforts to recalibrate growth engines. Goal No. 1 is supporting startups to generate more energy and job creation from the ground up, not the top down. 

Korea has made important inroads and entrepreneurs are stepping up to disrupt the economy. The playing field, though, must be altered so that small-and-midsize companies can thrive and best the chaebols that still tower over the place. 

In Japan, Prime Minister Kishida must get a handle on the yen’s trajectory. For all the accolades for late Prime Minister Shinzo Abe since his assassination on July 8, the weak yen is a dangerous side effect of Abenomics. For a Group of Seven nation, Japan has an oddly developing-nation-like theory on currencies. Abe’s weak yen gambit is really backfiring. 

Now that Kishida no longer has mentor Abe looking over his shoulder, will he act boldly to remake an aging, uncompetitive economy? Can his Finance Ministry and central bank avoid another bout of 1997-like turbulence?

Only time will tell. But jokes in Tokyo about renaming the yen the “peso” are no longer funny. The yen’s growing threat to the global financial system is growing more serious by the day.

By William Pesek

William Pesek is an award-winning Tokyo-based journalist and author of Japanization: What the World Can Learn from Japan's Lost Decades. Previously, he was a columnist for Bloomberg and Barron’s.