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The Globe and Mail

Bank of Japan vs. the yen's irrepressible rise

Japanese 10,000 yen notes (L) and U.S. $100 notes are seen in this picture illustration.

TRUTH LEEM/REUTERS

Japanese officials are once again trying to shout down the yen. The finance minister has gone as far as asking the central bank to resume printing money. A weaker yen would help the country's beleaguered exporters. But it could also hit the savings of the country's increasingly aged population and drive up borrowing costs for a government with debts at twice the level of GDP. So while the central bank may try to punish traders looking for a one-way bet, it may not have the stomach for a real fight.

A string of Japanese exporters – from Fujitsu to Toshiba and Sony – has blamed the yen for weaker profits, providing a chorus for one of the government's frequent laments. A strong yen reduces the value of dollars earned abroad and makes Japanese products more expensive relative to those produced by the likes of South Korea.

One might expect the yen to fall on the back of the stretched government finances. Growth is also weak. Japan recorded a $32-billion (U.S.) trade deficit last year, its first since 1980. Record acquisitions abroad by cash-rich Japanese companies and banks could also crop the yen. But more powerful forces, including Japan's foreign reserves position and current account surplus, are in support. And deflation means real interest rates are positive even though the central bank keeps nominal rates near zero.

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Deflation also boosts the buying power of the increasing number of retired Japanese voters living off their savings. With the country's birth rate declining, Japan's population is now expected to drop by a third by 2060, when two-fifths of Japanese will be over 65. Their savings are plowed largely into government bonds. As a result, 95 per cent of Japan's $14-trillion in public debt is financed domestically and the government borrows at below 1 per cent.

Japan's savers would not take kindly to inflation-fuelling programs of quantitative easing. If it also leads them to demand more interest on Japanese government bonds, even small shifts could bring the government enormous new costs.

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