Japan: Naoto Kan, Japan’s beleaguered prime minister, tried a bit of half-hearted fiscal and monetary stimulus on Monday. By Tuesday the policy was deemed a failure. The Nikkei fell three per cent. Direct intervention in the currency markets to weaken the yen may be coming. But it is hard to be hopeful. US data is more likely to determine the yen’s fate than Japanese policy. Japan will remain dependent — until it shakes itself up with something more than stimulus and intervention. Kan himself may realise that. His critics don’t.
The stimulus disappointed some this time because it came in minor doses. On Monday Kan, who is keen not to add to Japan’s debt mountain, added to it by ¥920 billion ($11 billion) dollars – a fraction of the ¥11 trillion stimulus that coalition partners had called for. Monetarily, too, the measures were modest. The Bank of Japan conjured ¥10 trillion in cheap six-month loans for banks, adding to the ¥20 trillion three-month loans already in place. But consumer demand is lacking. The monetary move isn’t expected to do much.
That Kan took even token action is a reflection of the intense pressure he is under. He faces a threat to his leadership of the Democratic Party of Japan from Ichiro Ozawa, a member of the party’s old guard, who is set to challenge him in a mid-September leadership election.
Unfairly, the yen has become a benchmark of whether Kan can or can’t do. He may instruct the BoJ to sell yen and buy dollars if the yen strengthens further towards ¥80 per dollar. Forex traders have been half expecting such a move. And the yen will fall initially. But if US data disappoints again, the yen’s appreciation could easily resume, making the intervention a waste.
Japan’s yen debate might be seen as a symbol. Japan depends on growth elsewhere. Kan is rightly reluctant to turn again to stimulus and intervention as a means of addressing domestic weakness. But political rivals and businesses call for the old palliatives. What Kan needs to do is come up with something deeper, addressing the paternalistic country's long-standing weaknesses. That is a huge ask for anyone - let alone a prime minister who is battling for survival.