How far: the growing monetary gap between Asia and America

Japan Racing Association

I was surprised the first time I came across a Japanese coin with a hole in the middle.

As far as I know, no coins in Europe or North America have holes. But in Japan, five yen coins and 50 yen coins include this striking feature.

People who study coins – a field known as numismatology – place great importance on holes because they reveal a connection between modern Japanese coinage and ancient China. In the early centuries of the first millennium CE, Chinese merchants traveled abroad with bags full of Ban Liang coins, hoping to persuade foreigners to use them.

Alas, the Japanese were not impressed. They preferred to barter rice or pieces of cloth. This continued until around 700 AD when a technological innovator came to power in Nara.

Empress Gemmei (San’ei-sha)

This visionary was Empress Genmei. She supported the copper industry and urged metalworkers to mint an independent imperial mint. Like the Chinese prototypes, the first Japanese copper coins were perforated. Today, I fear that such copycat behavior will lead to allegations of intellectual property theft.

Volatile currencies

The economies of modern Japan and modern China are quite different from each other. However, for the past few months, financial news from Asia has been dominated by the decline in both countries’ currencies against the US dollar.

The price-adjusted Japanese yen is at its lowest since the 1970s. The yen began to decline in 2021 when it became clear that the US Federal Reserve would raise interest rates, creating a widening gap between yields in the Pacific.

Today, the Fed is under pressure to solve two serious problems: very high inflation and the growing risk of a recession later this year. The European economy is also slowing down and it could well slip into a recession if there were to be a major dispute over gas supply due to the war in Ukraine.

The recent surge in oil and gas prices precipitated the decline in the value of the Japanese currency. Unlike previous periods of geopolitical turmoil, investors no longer regard the yen as a “safe haven”.

Long term outlook

Will the yen stay weak or is it just a temporary dip?

Well, the Bank of Japan said in March that recent increases in energy prices will weigh on the Japanese economy in the short term but will eventually fade.

However, given that the central bank is determined not to follow the Fed in raising interest rates, a weak yen seems inevitable.

This trend, combined with rising oil prices, is leading to painful inflation in Japan. Delivery drivers are appalled by rising gas prices at the pump and shoppers are shocked at how expensive imported foods, such as cheese, have become in supermarkets.

I have met some patriotic traders in Tokyo who are pushing the yen up. But most economists warn that the Bank of Japan’s reluctance to raise rates is a sign that it has run out of practical options to get the economy back on track.

Workers in protective gear guard a street during a COVID-19 lockdown in Shanghai, China April 16, 2022. REUTERS/Aly Song

China’s Covid crackdown

As for China, the yuan lost nearly 4% of its value against the US dollar in April. This is mainly related to the strain on the economy caused by the communist government’s stubborn adherence to a “zero-COVID” strategy, which uses mass testing and strict lockdowns to try to prevent the spread of the virus. Shanghai has been in special measures for a month.

The official line is that this strict approach ensures people’s safety and a low death rate. However, this is not the complete picture. I have seen reports that some buildings in Shanghai have been surrounded by green fences, which have been erected by soldiers in protective gear, leaving people trapped inside their homes. When residents attempt to complain, their voices are quickly silenced.

China’s economic figures for April will be “certainly dire” according to Gavekal Dragonomics, a consultancy. I also believe that the implications for the Chinese currency would be even more serious if the yuan were allowed to trade freely in the markets. Instead, it is protected by the government, which limits its movements against the dollar.

Ancient Chinese coins on a string [Courtesy Wikimedia Commons].

Spend, spend, spend

Concerns about the Chinese currency could deter its central bank, the People’s Bank of China, from cutting interest rates to revive growth. That leaves its leaders obsessed with the idea that fiscal stimulus is the way out of trouble. Citigroup, a bank, predicts that infrastructure spending in China could increase by 8% this year.

Japanese Prime Minister Fumio Kishida has tried a similar approach. Shortly after his election last year, he unveiled a record stimulus package, worth around 56 trillion Japanese yen ($490 billion).

This is a huge number and yet I recognize that many people may not see much benefit in their daily lives from this lavish government spending.

Nevertheless, in some respects, the Japanese can consider themselves lucky. There is no more confinement. Foreigners are slowly coming back.

It’s not a perfect situation, of course. There are still good reasons to worry about global oil prices, supply chain bottlenecks, the COVID problem in China, and a looming recession in the US and Europe.

Yet, as the small space in the middle of the coins reminds us, there is often a gap between perfection and reality. There are even stories that the hole is for people to find unity with peace in prayer. This theory seems a bit vague and I don’t know if the myth originated in China or Japan.

Still, it’s a charming idea and surely, both lands could enjoy some good fortune right now.


Author: Duncan Bartlett

Duncan Bartlett regularly contributes to JAPAN Striker. You can read his more articles and essays here.


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