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Yen's Drop In Value Could Fuel Curency War


Japan's economy is finally getting a lift. The stock market is soaring there. Companies like Toyota and Sony are seeing a surge in profits. And today, Japan's government reported the economy grew a three-and-a-half percent annual rate in the first three months of the year, a significant improvement.

Now, the government has prodded growth by causing the value of the currency, the yen, to decrease against other currencies like the dollar. That affects the price of everything Japan buys and sells - for example, dropping the price of Japanese exports. And now analysts fear that could fuel a currency war. NPR's John Ydstie has our Business Bottom Line.

JOHN YDSTIE, BYLINE: The dramatic shift in Japanese policy has sent the value of the country's currency tumbling around 30 percent since last September. Last week, it crossed the 100 yen to the dollar mark, a level not seen in four years. That's made Japanese products cheaper in global markets, and has competitors around the world howling for relief.

C. Fred Bergsten, director emeritus of the Peterson Institute for International Economics, says that includes U.S. industries, most notably U.S. auto companies.

C. FRED BERGSTEN: They've been urging the Congress, for example, to oppose Japan's coming into the new transpacific partnership trade negotiations with the U.S. They've said they'll oppose that big trade agreement across the Pacific if Japan is in it without rectifying the currency problem.

YDSTIE: The value of the Yen is falling because the Bank of Japan is flooding the country's economy with huge amounts of cash. And some of Japan's other big competitors, like South Korea, have threatened to devalue their own currencies in response. But Bergsten says Japan's current policy is defensible. He says unlike China's manipulation of its currency, Japan's stimulus policy is aimed at boosting its internal growth, not grabbing market share from foreign competitors.

BERGSTEN: If Japan gets back on track through expanding domestic demand, getting consumption going, getting private investment in Japan up, and that does increase their imports, it spills over to the rest of the world as a favorable effect.

YDSTIE: But, Bergsten says, it could also end badly. If Japan simply takes advantage of the devalued yen to boost its own growth by exporting more, it will be a negative for the global economy. Economist Richard Koo of the Nomura Research Institute has spent the past several years analyzing the effects of massive central bank intervention in the U.S. and Europe.

He says the Bank of Japan's huge quantitative easing - which is at about twice the level of the Federal Reserves - does appear to be having positive effects inside Japan, including a 50 percent boost in the Japanese stock market in the past six months.

RICHARD KOO: This rise in the stock market definitely is producing positive results for the Japanese economy. People are feeling much more confident about the future, the Yen is weaker, and so companies are finally beginning to say maybe we can compete in this world after all.

YDSTIE: But, Koo says, the central bank's efforts will fail if they're not combined with other measures being pushed by Japan's Prime Minister Shinzo Abe. They include government spending on infrastructure, market opening reforms in the country's economy, and investment incentives for Japanese companies. They've been unwilling to borrow and invest for the past 20 years, he says, despite 0 percent interest rates.

That's because the companies over-borrowed during Japan's stock market and real estate bubble years, and lost big when the bubble burst.

KOO: And that's just like the Americans after the Great Depression. Those Americans who lived through the Great Depression never wanted to borrow money after that, because of the traumatic experience they went through in the 1930s. We have a mini version of that in Japan. Even though the balance sheets are clean, bankers are willing to lend, interest rates lowest in history, companies are not borrowing money.

YDSTIE: Koo says markets could collapse again when the central banks around the world finally reverse coarse and begin pulling money out of the economy to keep inflation in check. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

John Ydstie has covered the economy, Wall Street, and the Federal Reserve at NPR for nearly three decades. Over the years, NPR has also employed Ydstie's reporting skills to cover major stories like the aftermath of Sept. 11, Hurricane Katrina, the Jack Abramoff lobbying scandal, and the implementation of the Affordable Care Act. He was a lead reporter in NPR's coverage of the global financial crisis and the Great Recession, as well as the network's coverage of President Trump's economic policies. Ydstie has also been a guest host on the NPR news programs Morning Edition, All Things Considered, and Weekend Edition. Ydstie stepped back from full-time reporting in late 2018, but plans to continue to contribute to NPR through part-time assignments and work on special projects.