Lots More With Brad Setser on the Yen, a New China Shock and Excavators

Episode Summary

Executive Summary: The episode centers on Bloomberg economist Brad Setser’s view that Japan’s weak yen reflects large rate differentials and has prompted intervention to slow, not reverse, depreciation. It then broadens to China’s export resurgence, arguing weak currencies, excess capacity, and industrial overbuild are boosting exports in autos, clean tech, and construction equipment, with important implications for trade tensions and financial interdependence.

Main Topics: Yen weakness and Japanese intervention (Priority: 5/5): Setser explains that the yen’s slide is driven mainly by low Japanese rates versus higher U.S./European rates, with the Ministry of Finance intervening to set a floor near 150-154 rather than permanently strengthen the currency. Why Japan wants some inflation (Priority: 4/5): The discussion addresses Japan’s long struggle with low inflation, why policymakers see zero inflation and zero rates as limiting policy flexibility, and how weak yen effects can raise import costs and cut real wages. China’s export boom and the ‘new China shock’ (Priority: 5/5): Setser argues that China’s exports are rising not just in headline dollar terms but in volume, driven by falling export prices, weak yuan conditions, and strong competitiveness in EVs, solar panels, batteries, and autos. Currencies vs. industrial competitiveness (Priority: 4/5): The conversation debates whether exchange rates still matter in a world of technological exports and supply-chain shifts; Setser insists currencies remain important and can amplify export gains when domestic demand is weak. Excavators, steel, and excess capacity (Priority: 4/5): Setser uses excavators and steel as examples of Chinese overcapacity being redirected abroad as domestic construction slows, illustrating how industrial capacity built for China’s home market is now feeding exports. Financial interdependence vs. real-economy dependence (Priority: 5/5): The final segment distinguishes China’s financial exposure from its dependence on real goods flows, arguing that trade restrictions and export controls can matter more than treasury holdings or reserve assets in a crisis.

Key Arguments: The yen’s weakness is primarily a yen story, not just dollar strength, because Japan’s interest rates remain far below those in the U.S. and Europe. Japanese intervention is aimed at limiting further depreciation and smoothing the range, not creating sustained yen appreciation. Low inflation in Japan matters because it constrains monetary policy and can make wage adjustments harder, while a weak yen raises import costs and depresses real wages. China’s export growth is stronger than the headline data suggest because export prices are falling; volumes may be up around 10%. The ‘new China shock’ is concentrated in autos, EVs, solar, batteries, steel, and construction equipment, where China has both scale and cost advantages. Currencies still matter for trade competitiveness: weak yen, weak won, and weak yuan can help exporters gain market share, especially when domestic demand is soft. Chinese overcapacity and weak domestic construction are pushing excavators, steel, and other industrial inputs into global markets. Financial interdependence and real-economy interdependence are not the same: losing access to goods and components may be more destabilizing than losing access to financial assets. China has diversified reserves and reduced dependence on foreign-currency assets, but its exporters and growth model still rely heavily on external demand.

Data Points: Yen move after intervention: roughly 160 to 152, then drifting back toward 155 - Brad Setser describes the yen’s reaction to recent intervention by Japan’s Ministry of Finance. Desired yen range for Ministry of Finance: 150 to 154 - Setser says this is the range Japanese authorities would prefer to keep the currency within. Real terms yen level: back to early 1970s levels - Setser says the yen is extremely weak in real terms relative to historical purchasing power. China export growth (headline): 1.5% increase in dollar terms - Referenced from the morning export data, above a 1.3% forecast. China export forecast: 1.3% - Forecast mentioned alongside the actual export increase. China export volume growth: more like 10% - Setser estimates exports are much stronger in volume terms because export prices are falling. Chinese real yuan weakening: roughly 10% in real terms - Setser says the yuan has weakened in real terms against the dollar over time. China steel exports: exceed U.S. steel production - Used to illustrate the scale of Chinese industrial export capacity. China car exports: 5 million vehicles - Setser cites current export scale as evidence of the shock to global auto markets. Potential China car export capacity: 10 million vehicles - Setser argues China still has room to expand exports further. Chinese excavator price example: $2,000 - A caller notes Alibaba listings for mini excavators from China, underscoring low-cost industrial exports.

Pivotal Quotes: "The goal of intervention, some people argue the goal of intervention is to change the direction, go from yen weakness to yen strength. I think that's an unrealistic goal." — Brad Setser: On what Japanese currency intervention is actually trying to achieve. "I think there is a concern. And that's why the Ministry of Finance is, you know, intervening and trying to separately limit yen weakness." — Brad Setser: On why Japan is acting even if intervention cannot fully reverse the currency trend. "Currencies, in my view, still matter." — Brad Setser: On whether exchange rates still influence trade competitiveness amid new industrial dynamics.

Implications: Weak Asian currencies and Chinese overcapacity may keep pressuring global manufacturers and raising trade tensions. For Japan, intervention may only slow yen decline. For the U.S. and allies, real-goods dependence on China may matter more than financial leverage in a crisis.