Yen’s 24% Plunge Is Crisis Warning World Can’t Ignore

The only thing in Tokyo falling more dramatically than the yen is Prime Minister Fumio Kishida’s political fortunes.

What a difference a couple of months make—or 67 days, to be exact. It’s been that long since Kishida’s benefactor Shinzo Abe was assassinated by a crazed gunman. At that very moment, Kishida seemed to be on something of a roll.

On July 8, the day Abe met his tragic fate in the western city of Kobe, Kishida was nine months into an event-rich premiership. And while his approval rating wasn’t state-of-the-art at about 48%, it was hardly bad for a Japanese leader. When Abe resigned as the nation’s longest-serving leader in September 2020, his approval rate was scraping 30%.

Around July 8, the economy was beginning to reopen from Covid-19. Kishida’s government was winning high markets for its assertive support of Ukraine and sanctions on Vladimir Putin’s regime.

There was a sense that now that “shadow shogun” Abe was no longer calling the political shots—or mulling yet another run at the premiership—Kishida could be his own man. Kishida, it was hoped, might be empowered by a new sense of independence to reform an economy losing ground to China.

Instead, things have gone awry. Kishida’s support is down around 40% amid anger over a costly state funeral the ruling Liberal Democratic Party plans for Abe on September 27. Voters also are irked by LDP ties to the controversial Unification Church, whose followers are colloquially known as Moonies.

The 41-year-old gunman told police he targeted Abe because of Abe’s perceived support of the church, which the suspect blames for bankrupting his family. Since then, a barrage of news stories about the LDP’s reliance on the church for funding and voters put any number of scandals in the spotlight. These controversies are now backfiring on Kishida’s reform prospects as his tenure approaches the one-year mark.

Abe, Japan’s longest-serving leader, was quite the aberration, having lasted nearly eight years in his most recent stint. The previous six governments each lasted 12 months—so did that of Abe’s immediate successor Yoshihide Suga. Can Kishida avoid the revolving door that’s beginning to spin again?

Even if Kishida does get another year or two, the political capital he needs to recalibrate a change-averse economy is dwindling, and fast.

When he took office last Oct. 4, Kishida pledged to engineer a “new capitalism” for Japan’s 126 million people. The aim is to better distribute the fruits of gross domestic product, particularly amongst the middle class and lower-income groups.

But given how little success Abe had from 2012 to 2020 in altering economic incentives, Kishida has his work cut out. Abe took power promising to cut bureaucracy, loosen labor markets, incentivize innovation, internationalize business practices, empower women and attract more foreign talent.

When Abe stepped down two years ago this week, Japan Inc. was only minimally changed. Abe’s 2,821 days wielding power—3,186 if you include his 2006-2007 premiership—was a window of opportunity to get back into the economic fight versus Chinese dominance in Asia. And now it’s gone.

This made the early days of Kishida’s premiership awkward. As he set out to recalibrate growth drivers, he was effectively admitting that Abe had failed.

The yen’s 24% plunge this year to 24-year lows bears the LDP’s fingerprints. Since the late 1990s, a succession of governments favored a weak exchange rate to boost exports. Tokyo is now losing control over the yen as the Federal Reserve hikes rates. And its trajectory is a crisis warning for the global economy. The more the yen slides, the more China and the rest of Asia might feel pressure to devalue, 1997-style.

Kishida’s new-capitalism plan is in serious jeopardy, too. Sliding poll numbers give Kishida limited influence to prod legislators to upgrade an aging economic system.

Already, Kishida appears to be bowing to Japan’s powerful nuclear lobby as he accelerates efforts to restart reactors offline since the 2011 Fukushima radiation crisis. Sure, Japan could use all the help it can find amid surging oil and gas prices.

But Japan is uniquely vulnerable to seismic shocks, and the public remains wary of trusting the nuclear industry again. What’s more, Japan’s future should be inventing and commercializing renewable energy. The nation has a fabled history of energy innovation and vast potential to take solar, wind and geothermal power technology to new frontiers.

Look no further than Elon Musk’s Tesla deepening its partnership with battery pioneer Panasonic. Or Toyota joining Nissan in going big on investments in electric-vehicle innovation.

Kishida should be working harder to implement his plan to support a startup boom rather than throwing the nuclear industry a lifeline. That also means altering tax incentives toward young entrepreneurs and smaller ventures and away from generations-old export giants.

So much of what Japan long excelled at is being commoditized in real-time. Take South Korea, which has long since become a powerful rival in cars, electronics, robots, ships and popular entertainment from boybands to movies. Taiwan is always raising its innovative game. Developing neighbors like Indonesia are beating Japan in the race for tech “unicorn” startups.

China, meantime, is investing trillions in owning the future of aerospace, artificial intelligence, automation, biotechnology, cloud computing, electric vehicles, high-speed rail, renewables and semiconductors. It’s also miles ahead of Japan in creating a central bank-issued digital currency.

So, Kishida has zero time to waste shaking up the economy. And yet the political capital he needs to take on the establishment is dwindling just as Tokyo’s revolving door shows signs of spinning anew.