Thursday, February 08, 2007

Lack of Yen Purchases Reveals Japan's Mercantilist Currency Policy

I have in several posts on this blog discussed the negative effects of the weak yen, which is ultimately the result of the near zero short term interest rates in Japan.

I now see via Brad Setser that Financial Times calls for the Bank of Japan to buy yen. The Bank of Japan sold yen (i.e. increased foreign exchange reserves) in massive quantities during 2003 and 2004, when the dollar was under strong downward pressure because of the Federal Reserve's 1% interest rate policy. The official reason cited by the Bank of Japan for this was their alleged comittment to "currency stability" and their alleged fear of "wild exchange rate fluctuations". But as have been illustrated by their failure to buy yen when the yen is falling, that was a lie. What they feared wasn't exchange rate fluctuations per se, but yen appreciation. Yen depreciation is however something they welcome.

Were the yen to suddenly rise sharply, you can be sure that the Bank of Japan would sell yen. All of this certainly make the complaints by European countries about the weak yen justified.


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