Japan's policy dilemma: weak yen, corporate profits vs. household pain (with Shery Ahn, Haidi Stroud-Watts)

The yen is at 162.66, its weakest since 1986. Is there a red line for Japanese authorities?

Shery Ahn

Jesper Koll

There is no red line. Corporate Japan is happy with the weak yen boosting profits. The policy path is expansive fiscal + moderate rate hikes. We are heading toward 200 yen to the dollar.

Corporate profits are up $6 billion from the weak yen, but how does this translate to households facing higher import costs and inflation?

Shery Ahn

Jesper Koll

Every 10 yen of depreciation reduces household purchasing power by ~0.5%. The weak yen is a tax on households. But the government benefits from higher inflation tax revenues, so it's good for the government and corporations, bad for the people.

When will political pressure force the government to act on the weak yen?

Shery Ahn

Jesper Koll

The break point will be housing affordability. Real estate prices have made it so expensive that a top graduate now spends 50% of income on an average Tokyo apartment, similar to the 1987-88 bubble. That will force the BOJ to become more radical.

Takaichi's ¥370 trillion industrial policy plan spans AI, semiconductors, defense, shipbuilding. Will this trickle down to households?

Shery Ahn

Jesper Koll

It's a separate issue. Business investment is growing double-digit for the third consecutive year, creating jobs for the young. But the pain for retirees and older people from rising prices will continue. Takaichi's policy is corporate Japan first, people afterwards.

Wages for the young will accelerate in the second round, but it's skewed.

Would intervention even make a difference given the Fed and U.S. economic backdrop?

Shery Ahn

Jesper Koll

Intervention would just fuel the fire for speculators. The carry trade (borrow at 1% in Japan, invest at 4%+ in the U.S.) is what everyone is doing, from macro speculators to retail investors.

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