Japanese Finance Minister Fujii's First Time on the Job

September 16, 2009

Finance Minister Hirohisa Fujii made a stir already with comments that yen strength would not be resisted and an agenda to launch macroeconomic measures that will encourage a rotation of growth away from exports and investment and toward personal consumption.  Some analysts are declaring the death of the yen carry trade.  Japanese interest rates remain very low although 3-month euroyen is now above its U.S. counterpart.  Equally necessary for a carry trade is the ingredient of confidence that the funding currency, in this case the yen, doesn’t appreciate.  That condition now seems dubious.

In covering Japan, it pays not to throw away notes because of the tradition of revolving-door politics.  The LDP may be out, but Fujii is a second-timer as head of the Ministry of Finance. His first stint covered August 9, 1993 -June 30, 1994, which was an active period in Japanese macroeconomic policy, strained trade tensions with the United States, and for negotiating a future sales tax hike — the highly ill-advised increase of 1997 — to secure permanent cuts in income taxes.

Officials intervened during the period — often and heavily, occasionally with other central banks but mostly on their own.  The yen was at 104.9/$ when Fujii took office, got as weak as 113 during his term, and was 99.1 when he stepped down, which was near its highs.  Japanese international reserves jumped by $70.5 billion while he was finance minister or $6.4 billion per month.  While much less than the climb in 2002-4, the increase indicates a hands-on yen policy, not at all like the stance Fujii has promised this time.  What’s interesting here is that Fujii started out in 1993-4 sounding much like now, predicting on September 1, 1993 a “big boost if benefits of yen appreciation are passed on to consumers.”  That posture quickly changed, however.  Under LDP rule, bureaucrats have been more powerful than politicians.  So possibly he was told by the permanent cadre in the Ministry of Finance not to make comments about the virtues of a strong currency and not to talk about letting market forces set exchange rates.  Instead, his remarks soon followed time-honored norms, calling rapid foreign exchange moves undesirable or threatening that officials will respond appropriately to speculative foreign exchange moves or as early as 09/27/93 insisting yen appreciation was having an adverse economic impact.

Another game that Fujii played with market rumors was to resist calls for more policy stimulus, to claim that the priority was to implement what had been legislated, and then to initiate more stimulus after all.  The Fiscal 1993 budget had three supplementary add-ons to the original, the most in 8 years.  He fought efforts to raise fiscal deficit spending, in part to get agreement to raise sales taxes later in the decade, and in the end oversaw significant incremental fiscal stimulus.

Japan played the role then that China does now.  Bill Clinton was a fairly new U.S. president, and his administration was pressing Japan to enact surplus reduction targets.  Fujii was in the middle of Japanese efforts to resist doing such.  He was also under pressure to deregulate as a means to boost U.S. exports to Japan.

In those days, the Bank of Japan was much less independent than now and could not indefinitely steer a course different from what politicians wanted.  So Fujii made lots of remarks about monetary policy, often claiming that Japanese officials rates were plenty low already and other times complaining that banks were not passing previous cuts by the BOJ in full  on to borrowers.  Just a few weeks after becoming finance minister, the BOJ discount rate was slashed by 75 basis points to 1.75%.  While that was the only such cut in his time at the helm, the Bank of Japan engineered a deeper reduction of 120 basis points in overnight interest rates to around 2.68% by the time Fujii left office.

Japan was in recession at the beginning of his first term.  There was constant fear of a double-dip downturn even after activity stabilized and had begun a very gradual recovery.  Portents of the deflation problem that struck subsequently could be seen the decelerating trend of consumer price inflation from 1.9% when Fujii started to 0.6% when he stepped down.  Ten-year JGB yields were at 4.13% in August 1993 and still elevated at 4.33% in mid-1994.  The Nikkei was much higher than now yet far below its end-1989 peak.  There was little net change between when he arrived a left, but stock prices fell sharply enough in between to generate calls for measures to boost then directly — calls that Fujii resisted.

Fujii represented a party coalition not led by the LDP during his first time as finance minister, but it had a much shakier mandate than now.  He had to toe the line dictated by MOF bureaucrats.  The mandate is stronger this time, but sometimes traditions transcend political numbers. The death of the carry trade is contingent on Fujii really wanting a strong yen and being able to chart his own course and not what the permanent cadre tell him to do.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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