Relief in Japan as Gaffes Weaken Yen

Embarrassing videos of Japan's Finance Minister, coupled with Prime Minister Aso's record-low approval ratings, have led, finally, to a weakening yen

By Ian Rowley

Japanese Finance Minister Shoichi Nakagawa arrived at the official residence of Prime Minister Taro Aso in Tokyo on February 17, 2009 to offer his resignation after appearing to be drunk at the Group of Seven meeting in Rome. TORU YAMANAKA/AFP/Getty Images

After an acutely embarrassing performance at the G-7 meeting in Rome on Feb. 14, Japan's Finance Minister, Shoichi Nakagawa, quickly became something of a global star. YouTube video clips of him, seemingly drunk at a press conference, were an instant Internet hit. As global news channels, looking for some light relief from the credit crunch, also broadcast the slurring Nakagawa, his fame spread further. In Japan, though, the abject performance, which Nakagawa blamed on strong cold medicine, came in for intense criticism and the 55-year-old resigned on Feb. 17.

Yet perhaps it's time to cut Nakagawa a little slack. While Prime Minister Taro Aso, who is battling record-low poll ratings, is unlikely to buy his erstwhile Finance Minister a drink any time soon, Nakagawa's woes brought stacks of global attention to the troubles facing Japan's economy and Aso's limp government. On the face of it that doesn't sound like positive news, but it's been enough to make investors think again. (One recent survey gave Aso a disapproval rating of 80%.) Ironically, that attention could be a tonic for Japan's suffering economy.

Until recently, the conventional wisdom among investors was that Japan, underpinned by a relatively sound financial system, was a safe haven during the current economic crisis. That triggered huge buying of the yen last year as the currency surged to 13-year highs against the greenback in December. Japanese exporters, already suffering amid a global slowdown, were left facing a huge loss of competitiveness just when they were hurting most. Worse, with the rest of the world's economy's also floundering, the Aso government has had few policy options available that could weaken the yen. Unlike in 2004, when Japan last intervened, government , for instance, would not have been well received in Washington. Indeed, while President Barack Obama gave Aso the honor of being the first foreign leader to meet with him at the White House, on Feb. 24, the new U.S. Administration has made it clear it doesn't want Japan to attempt to weaken the yen in the currency markets. A gift from Aso of lacquered chopsticks made in the Japanese town of Obama, north of Tokyo, is unlikely to have swayed the new President.

The Yen Losing Ground

Nakagawa, though, may have inadvertently added a new chapter to forthcoming books on how governments can influence the currency markets. Since he made headlines, the yen has lost ground against major currencies. Before the G-7 press conference, the yen traded at around 91.9 to the dollar. On Feb. 25 in Tokyo trading the yen breached 97 to the dollar for the first time since mid-November. That represents a fall of 5.6% in a little over a week. "It's the best policy measure since Koizumi," says Jesper Koll, CEO of Tantallon Research Japan, referring to Japan's reformist former Prime Minister Junichiro Koizumi. Nakagawa's muddled performance has had "more policy stimulus than three years' worth of Bank of Japan deliberations," he adds. Compared with the December peak of 87 to the dollar, the yen, while still painfully high for exporters, has at least now lost almost 10%.

Just as important, the yen has slipped by similar amounts or more against other currencies. For example, it has lost 4.7% against the euro since Nakagawa's accidental intervention. The British pound, which gave up 40% against the yen last year, has regained 6.3% since Nakagawa's press conference and 16% since mid-January. (That suggests comments by American investor Jim Rogers last month that the pound was "finished" may have been greatly exaggerated.)