No limit to how low the yen will go

TOKYO – Who needs Las Vegas or Macau when betting on how low the yen can go is the best game anywhere?

It’s not where the Bank of Japan wanted to find itself this week as it mulled interest rate policy. That Governor Kazuo Ueda’s team did nothing on Friday (April 26) was hardly surprising.

What was unexpected, though, is Tokyo’s lack of urgency to halt yen declines that risk upending economic dynamics from Beijing to Washington.

In neighboring China, the yen’s 10.6% drop so far this year has Xi Jinping’s team mulling its own options.

Despite 5.3% growth in the first quarter year on year, retail sales remain soft, “pointing to weaker demand,” says Carlos Casanova, economist at Union Bancaire Privée. “This suggests that domestic consumption lost momentum in March, in line with broad-based consumer-price index declines.”

China’s industrial output also continues to disappoint. “In our opinion,” Casanova notes, “this could suggest that manufacturing is not benefiting from the cyclical recovery in global trade as much as previously thought, due to overcapacity constraints in key sectors.”

These overcapacity trends could exacerbate deflation. No policy shift would stabilize consumer prices faster than a weaker yuan. Might Xi and People’s Bank of China Governor Pan Gongsheng pivot toward a weaker yuan?

Xi’s inner circle might view the yen’s unabated drop as political cover to engineer a more advantageous exchange rate that would boost exports and tame downward price pressures.

There would be just as many cons as pros, though. A weaker yuan might increase the risk of defaults as property developers struggle to repay offshore debt. It might hurt efforts to increase trust in the yuan. And it could poke the US political