Richard Harris

The View | Yen collapse and UK mini-budget debacle show it’s better to work with markets than fight them

Being stubborn on a matter of principle can be costly for politicians and policymakers. They need to remember the wisdom of crowds rather than ignoring the markets, as Liz Truss and the Bank of Japan have

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A pedestrian passes in front of an electronic stock board showing Japanese yen-US dollar conversion rate at a securities firm in Tokyo on October 28. A weakening of the yen against the dollar has amplified costs for imports. Photo: AP

Richard Harris

Published: 10:00pm, 3 Nov 2022Updated: 10:22pm, 3 Nov 2022

Swarm intelligence is where natural organisms make collaborative decisions. A flock of birds or a school of fish confounding a predator make better defensive decisions as a group than an individual. Such decisions adapt and change in real time to suit the prevailing conditions and near-term expectations.

Another example is the jelly bean experiment in psychology where a crowd is asked how many jelly beans are in a jar. Individuals are unlikely to get anywhere close, but the wisdom of the crowd makes the average guess very accurate. It sounds like the money markets.

I remember in late 1988 walking near Ginza and an apple on a fruit stall was US$40. At the same time, a small pizza cost US$30. Japan was booming, and it seemed as if it would go on forever. Everything was highly expensive as the yen had strengthened in the 1980s from around 280 to the US dollar to a high of around 120.

The Japanese economy at the time boasted three merits – low inflation, low interest rates and high growth, around 6.7 per cent in 1988. More than three decades later, the first two are still there but growth in the last 20 years has averaged just 0.53 per cent.

Until now, the Japanese yen has been one of the strongest currencies in the world, hitting an all-time high of around 73 in January 2012. It is now 147, having fallen 28 per cent in 2022 alone.

Admittedly, the US dollar index has moved up 16 per cent this year and performed well against almost every currency. However, the yen has especially suffered because the Japanese authorities have been committed to a policy of low interest rates.