Looking back at my previous posts, “Arguments for Rate Hikes Ignoring Adverse Effects are Out of the Question (1)“ and “(2),” the core point was that market participants in financial institutions who profit from rate hikes remain silent about the fact that such moves actually diminish GDP and the profits of small and medium-sized enterprises (SMEs). I believe I am stating the obvious, but perhaps because the “old media” fails to explain this properly, I have the impression that those who hold this view have become a minority. It is true that it is difficult for the general voter to grasp the ideal form of monetary policy under cost-push inflation compared to normal times, but I want everyone to at least understand the simple fact that raising interest rates worsens the economy.
On September 13, Jiji Press published an article titled, “U.S. Puts the Brakes on Yen Weakness and Dollar Strength; Joint Statement Issued to Japan on Exchange Rate Policy.” The joint statement by Finance Minister Katsunobu Kato and Treasury Secretary Bessent reportedly agreed that fiscal and monetary policies “will not target exchange rates for competitive purposes.” How should this be interpreted? While I am naturally not privy to the inner workings of diplomacy, I cannot agree with Jiji Press’s interpretation.
(1) Jiji Press’s Interpretation: “Japan was Overpowered by the U.S.”
The article cites the following three points:
- President Trump has repeatedly criticized Japan, saying they “always want a weak currency and are trying to do so now.”
- The U.S. Treasury’s semi-annual foreign exchange report in June pointed out that the continuation of the BOJ’s monetary tightening would “support the normalization of the weak yen against the dollar.”
- In an August interview with a U.S. news agency, Mr. Bessent stated that the BOJ’s rate hikes were “behind the curve.”
One could interpret this as President Trump viewing the weak yen itself as a problem, while the U.S. Treasury has been demanding rate hikes to rectify it. Jiji Press likely interpreted the joint statement as the U.S. prevailing—arguing that Japan’s rate hikes are too slow (the U.S. view; I believe they are too fast) and that the U.S. “put the brakes” on Japan by declaring that targeting a weak yen would not be tolerated.
However, this view is far too superficial.
(2) To Me, It Looks Like Japan Overpowered the U.S.
If the “fiscal policy” mentioned in the joint statement refers to market intervention by the Ministry of Finance, then “do not conduct yen-selling/dollar-buying interventions” would be a clear message. However, in 2024, Japan actually conducted yen-buying interventions; the negative effects of the weak yen are what’s being strongly felt. Barring the distant future, there is no way Japan would conduct yen-selling interventions to boost exports now. In other words, this phrasing is utterly meaningless.
What about monetary policy? Monetary policy is conducted with price targets in mind, and it is none of the U.S.’s business. Even if the U.S. side suspects that Japan is “actually aiming to maintain a weak yen rather than targeting prices,” there is no way to prove it. If they want to narrow the interest rate gap between Japan and the U.S., the U.S. should simply lower its own rates. Directing Japan to raise rates is entirely misplaced.
Therefore, regarding both fiscal and monetary policy, the statement is completely hollow. If the U.S. wanted to force Japan to raise rates but the joint statement was neutralized into something toothless, then it is actually a diplomatic victory for the Japanese side. One can only conclude that Minister Kato did a good job in that regard.
(3) The Folly: Defeating the U.S. Without Serving the National Interest
That being said, wasn’t Japan supposed to be seeking a stronger yen in the first place? If the U.S. also wants a stronger yen, then their interests should fundamentally align.
In other words, even if Japan didn’t raise interest rates, a coordinated U.S.-Japan intervention (buying yen and selling dollars) based on the premise that the yen’s weakness had gone too far would have had a significant impact. This would have been the “Second Plaza Accord” that was briefly discussed. It appears that Minister Kato has personally abandoned a scenario where the yen strengthens without a rate hike.
What do you all think about this? Including the matter of the 80-trillion-yen investment in the U.S., this makes the LDP-Komeito administration look like it is pandering to export companies. Or perhaps there are forces that do not want to collapse the high stock prices driven by those exporters? It is disappointing that there is so little discussion pursuing Minister Kato from a perspective such as mine.
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