Japan-US Summit and the Impact of Bidenomics - Need to Prepare for a Weakening Dollar and Strengthening Yen

On May 7, 2022, Japanese media outlets reported that US President Biden stated that the reason for Japan's economic downturn was due to "Japan's policy of shunning foreign workers." In response, Chief Cabinet Secretary Matsuno held a press conference, expressing regret that President Biden's remarks stemmed from a lack of understanding of Japanese policies. He stated that the Japanese government would re-explain its stance to the US side. This statement appears to be related to the Biden administration's economic policy, known as Bidenomics.

Bidenomics aims to overcome two crises: the novel coronavirus and worsening employment. Specifically, it plans to implement policies such as expanding government spending, raising corporate taxes, increasing the minimum wage, investing in infrastructure, and promoting the Buy American policy (favoring American-made products). If these policies are implemented, it is expected that the US fiscal deficit will expand, leading to a decline in Treasury bond prices and a weakening of the dollar.

Carter, a professor at Princeton University, presented research findings that a 1% increase in government spending leads to a 1.6% increase in GDP. According to this, Biden's government's policy of expanding fiscal spending is expected to contribute to economic recovery. However, if this results in a weakening of the dollar and strengthening of the yen, it could place a significant burden on the Japanese economy.

Indeed, the Nikkei Research Center estimates, considering government debt and real interest rates, that the exchange rate will significantly weaken from 1 USD = 106 JPY (as of July-September 2020) to 1 USD = 97 JPY in the future. This aligns with the anticipated weakening of the dollar under Bidenomics.

The Japanese government needs to prepare for such exchange rate fluctuations. Prime Minister Suga presented a new growth strategy centered on the "green" and "digital" fields in his policy speech at the 204th session of the Diet, but it has been criticized for lacking concrete policies. If the yen strengthens, a decline in external competitiveness is inevitable, making it urgent to develop countermeasures.

Meanwhile, President Biden and Prime Minister Kishida held a summit on May 10th, confirming the strengthening of bilateral defense cooperation and enhanced collaboration in various fields, including economic security and space. They also expressed their opposition to China's unilateral attempts to change the status quo. For Japan, it appears crucial to work closely with the Biden administration to alleviate concerns about Bidenomics and minimize economic risks.

In summary, the Biden administration's economic policies are likely to lead to a weakening of the dollar and strengthening of the yen. The Japanese government is in a situation where it needs to take proactive measures to minimize the adverse effects. It is also anticipated that it would be desirable for both countries to coordinate countermeasures regarding exchange rate fluctuations, based on the agreement on enhanced economic cooperation reached during the US-Japan summit.