Phony War Over Japanese Yen Masks Need for Supply-Side Measures in Land of Rising Sun
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
All this chatter about a so-called global currency war is utter nonsense. All that is happening is the Japanese are wisely taking steps to increase liquidity and depreciate their vastly overpriced yen. They are doing this in order to avoid deeper and deeper deflation. That deflation will sink the Japanese economy for years to come if remedial actions are not taken.
Among all the big economies, none needs quantitative easing more than Japan’s. All the Japanese have done so far is make cheap loans to banks, but with no concerted QE. But QE is coming this spring, when Prime Minster Abe appoints a new Bank of Japan headman.
Mostly through jawboning, the Abe government has lowered the yen in round numbers from about 77 to the dollar to roughly 93 to the dollar. It’s about a 20% change. Long overdue. My guess is the yen will wind up around 120 to the dollar as the year progresses.
To suggest that this is inflationary is a complete fantasy. It is aimed at stopping deflation. Over the past three years, nominal GDP in Japan has been roughly flat. In other words, total spending for the economy has been nil. That’s a recession. And a long one at that. (In some sense, Japan needs to recover from a 20-year recession.)
Now, monetary pump-priming is not the only solution for Japan’s economic woes. Supply-side tax cuts would go a long way toward promoting growth. There has been a small corporate tax cut, but more is needed.
Personal tax rates are way too high in Japan. And the Japanese stubbornly insist on all these ineffectual Keynesian deficit-spending policies. They are a complete waste of money and have run up Japanese debt to huge levels.
New fiscal policies are essential to promote growth in Japan. But just as inflation is a monetary phenomenon, so is deflation. And if Japan is going to correct this by adding reserves and depreciating the overvalued currency, this is all to the good.
Elsewhere around the world, the U.S. dollar has been steady. The dollar-gold price has fallen about $350 and remains in the mid-$1,600 range. The euro-dollar currency rate has been reasonably steady, between 1.30 and 1.40. The dollar itself is hovering around 80 on the DXY index. And on the other side of the world, the Chinese Yuan has been fairly stable.
So there is no currency war — just a more sensible Japanese monetary policy.
By the way, it’s no coincidence that a more pro-growth yen decline has helped trigger stock market rallies around the world.