Diplomacy of the Ministry of Finance: Promoting or Handicapping the Yen?

Abstract

Literature on Japanese foreign policy in the past has mostly focused on the issues that fell within the jurisdictions of either the Ministry of Foreign Affairs (MOFA) or the Ministry of International Trade and Industry (MITI). The MOFA is generally considered weak within the domestic bureaucracy, and it barely shares the jurisdiction over foreign economic policies with various economic ministries. Although the MITI has kept the MOFA at bay on most foreign economic issues, the MITI’s increasingly diverse clientele has meant that its independence has been somewhat reduced. Such diversity of interests among domestic actors and the inability of the political leadership in Japan to solve the infighting have been blamed for Japan’s reactive diplomacy and dependence on gaiatsu (external pressure) for policy recourse. This chapter will instead explore macroeconomic diplomacy by the Ministry of Finance (MOF), the most powerful ministry, which is believed to have maintained the highest degree of independence from domestic interests and other ministries. In reviewing the MOF macroeconomic policy and international currency adjustments, one can find two main reasons for Japan’s reactive macroeconomic diplomacy: external structural constraints and internal policy immobilism. Externally, the sheer size of the U.S. market and Japan’s dependence on it, as well as the use of the U.S. dollar for international transactions, present structural limits to Japan’s macroeconomic policy. The internationalization of yen to reduce this structural disadvantage has been discussed, but its implementation has faced domestic policy immobilism.