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Tony Fratto: This Time, Pay Attention to Change in Japan


Japan changes finance ministers only less frequently than Lady Gaga changes outfits, so it would be excusable to overlook yesterday’s announcement that Prime Minister Yukio Hatoyama named Naoto Kan to replace Hiroshi Fujii, who stepped down for health reasons.

But the switch to Kan could be different, and it could have implications for creating economic mischief.

After becoming Japan’s 6th finance minister in the past two years, Kan used his initial news conference to explicitly call for a weaker yen, a policy contrasting with his immediate predecessor who favored the long-term benefits of a strong yen.

Kan left no doubt about his intentions for the Japanese currency, asserting that ¥95 would be best for the country’s exporters, and his willingness to intervene in currency markets for the first time since March 2004.

“I'll first examine the various impacts that foreign exchange rate movements could have on the Japanese economy,” said Kan, “and in cooperation with the Bank of Japan, I will make efforts to deal with individual cases in order to bring the exchange rate to appropriate levels.”

While Kan’s remarks resulted in a quick – if short-lived – weakening of the yen in currency markets, and it’s questionable how much impact actual Japanese intervention would have, a shift in Japan’s foreign exchange stance has more extensive consequences for global economic policy.

First, a policy shift back to currency management by Japan would fly in the face of the G7’s decade-long promotion of flexible currencies among the world’s major economies – and it would specifically complicate efforts by the US Treasury and the EU to encourage currency flexibility in China. If Japan, the world’s second-largest economy, can manage its currency, why not China? In fact, it was this very argument that finally persuaded Japan to abandon foreign exchange interventions in 2004.

Second, an explicit effort on the part of Japan to weaken its currency to aid exporters would also lay waste to the G20’s repeated calls for nations to avoid beggar-thy-neighbor policies and protectionism in response to the financial crisis and global recession. If other nations follow Japan’s lead, we could find ourselves in a spiral of nationalistic, currency-led gamesmanship, spurring heightened protectionist sentiment.

So while yesterday’s change of leadership at Japan’s finance ministry may look like just another turn on the merry-go-‘round, pay closer attention to this one. It could have real implications for currency markets, for China, and for any hope of achieving trade liberalization any time soon.

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Tony Fratto is a CNBC on-air contributor and most recently served as Deputy Assistant to the President and Deputy Press Secretary for the Bush Administration.

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