Shinzo Abe, Japan’s prime minister, received a pleasant surprise yesterday when first-quarter gross domestic product was revealed to have surged, outstripping expectations.
It must have been particularly gratifying that growth was led by an expansion in domestic consumption. The rise in the yen since the beginning of the year, which has helped to dissipate some of the international tension over exchange rates, has failed to damage confidence. Mr Abe is hosting the G7 meeting of rich nations’ finance ministers in Japan next week and a fight over competitive devaluations is the last thing he wants.
But Mr Abe would be unwise to use the data, which are volatile and prone to revision, as an excuse to go ahead with a rise in sales tax due in April 2017. Better to use the G7 event to postpone the sales tax as many have predicted.
As it stands, Mr Abe can rebut accusations that Japan is reliant on competitive devaluation to boost growth. But his ministers have been raising the level of rhetoric in their warnings to financial markets about the possibility of intervention against the yen in recent weeks.
If Mr Abe turns away from activist fiscal policy towards foreign-exchange intervention, it will look like an admission that the domestic monetary and fiscal parts of Abenomics have failed.
There has been much talk of a truce in the global currency wars this year. The dollar, which had climbed nearly 25 per cent on a trade-weighted basis between mid 2014 and early 2016, prompting rising concern in Washington, has lost about a fifth of those gains since the end of January.
The efforts of the Chinese authorities to prevent a sharp fall in the renminbi have contributed greatly to stability. But as far as the G7 economies go, it was not clear at all that there was a currency war in the first place. While the yen and the euro dived after the Bank of Japan and the European Central Bank moved further towards super-loose monetary policy in recent years, these were natural consequences of the expansion of the domestic money supply, rather than a deliberate devaluation. The ECB even engineered a move into negative territory for interest rates earlier this year in a way that minimised the effect on the currency.
The real concern now is that Japan may feel forced towards direct foreign-exchange intervention to reverse recent gains in the yen. Masatsugu Asakawa, the vice-minister for international affairs and Japan’s top currency official, said this week that Tokyo regarded intervention as a legitimate part of its toolkit.
This may be true, but the use of that tool would be an unfortunate admission that it has failed to employ the other instruments adequately. The Bank of Japan has continued to loosen monetary policy this year, but it has moved in fits and starts.
Haruhiko Kuroda, its governor, appears to be engaged in a cat-and-mouse game of expectations about policy announcements with the markets rather than meeting the threat of stagnation and deflation with overwhelming firepower. On the fiscal front, Mr Abe’s equivocation over the sales tax rise does not suggest a full-throated commitment to using the public purse to boost growth.
Now is not the time to abandon fiscal and domestic monetary policy and go back to the old game of currency intervention. That can only inflame international relations, while having no more than a limited effect on the economy. Tokyo needs to show the G7 that it is serious about using all the weapons in its arsenal.
