yen-dollar irrationality

Charles Jannuzi b_rieux at
Thu Jan 9 02:38:12 MST 2003

In December 2001, Henry C.K. Liu wrote about a
yen currency crisis and in part said:

>>The Japanese Finance Minister remarked recently
that further falls of the yen would be consistent
with Japanese efforts to restructure its economy.
 The market interpretes these remarks as Japanese
government allowing the yen to fall to lower
levels. The market anticipated the yen to reach
135-136 levels within the next few months. With
IMF and US acquiesence, the yen may well fall to
160-170 levels.  In August 1998, when the yen
reached 147, Beijing threatened to devalue the
RMB. Washington and Tokyo staged a coordinated
interevention to reverse the
yen's fall. The US wants to yen to stay above 120
and Japan wants the
yen to fall below 120.  But 160-170 would mean a
total realignment of
the foreign exchange regime in Asia.<<

Questions for Henry, since he frequents this

In 1980 the yen was at about 226 to the dollar.
By 1987 it was around 145. Moving into the
Clinton-Rubin era, we see the yen reach 94 yen to
the dollar. In 2000, the yen had fallen back a
bit to about 108. I think now it's at about 120.
Sure, quite a bit weaker than it's historic high
of around 79 yen to the dollar, but nothing like
the cheap yen of the 1970s, which was always
below 200 yen to the dollar.

Question 1: why do people associated with western
finance constantly make a big deal about a
'weaker' yen? I see only one trend line here
since the dollar-yen peg was lifted in 1973, and
it is not analogous to apples falling from the
ground and landing on trees.

Question 2: who in 2001 would seriously think
that the US or the IMF would acquiesce to Japan
cheapening its yen to anything like 160-170? What
'market' thought this?

Question 3: in your opinion, is there any way for
Japan to get out of deflation without doing what
is now unspeakable--that is, cheapen the yen to
170 or even cheaper?

Question 4: does anyone where you work seriously
believe that the solution to deflation in Japan
is to clear loans (nationalize banks, force banks
to foreclose on companies, sell off distressed
assets cheap to private equity from the U.S.,
etc) from the banks' books? Isn't this confusing
cause with effect? The 'bad' loans aren't the
cause of deflation or recession, but the product
of it.

Charles Jannuzi (who loves his 'cheap' yen
everytime he buys those 'expensive' dollars)
Fukui, Japan

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