September 30, 2003


Japan dumps another 4.5 trillion yen (Japan Times, 10/01/03)

Japan spent 4.46 trillion yen between Aug. 28 and Sept. 26 intervening in the currency market to weaken the yen, the Finance Ministry said Tuesday.

The government has now tossed a record 13.48 trillion yen into yen-weakening operations since the beginning of the year.

The ministry has been conducting the effort to fight the yen's ascent, which makes exporting less profitable.

Currency interventions prove to be both fruitless and costly (CHRISTOPHER LINGLE, 10/01/03, The Japan Times)
The weakening of the U.S. dollar accelerated after finance ministers from the Group of Seven issued a communique calling for market-oriented international exchange rates. Soon afterward, the Japanese yen set a two-year high against the American currency.

Of course, Japanese exporters complain that the rising value of the yen will erode their profits. This has brought considerable political pressure to support government intervention in forex markets to avoid further advances in the value of the yen. [...]

While a stronger currency may adversely affect some exports, this impact is mitigated through diversification of domestic production. Intervening in currency markets discourages producers from making decisions that will be in their long-term interest.

It turns out that these interventions cannot alter the inevitable gains in the yen against the dollar because of the inherent weakness in the U.S. currency. Most market analysts and dealers expect the dollar to continue its downward path.

This is perhaps the most ruinous outcome of the irresponsible monetary policy pursued by the Federal Reserve under Chairman Alan Greenspan. By forcing interest rates down artificially, it has caused such a massive flood of dollars into the system that no amount of intervention will be able to stem its decline on global currency markets.

While forex intervention is likely to be fruitless, it involves high costs and is a distraction from implementing other policies that could promote long-term growth. Indeed, currency intervention goes against the most basic notion of financial prudence. Basically, buying dollars that are certain to be less valuable with yen that are becoming more valuable is equivalent to a "buy high, sell low" activity.

While the net impact of market-induced changes in currency valuations is uncertain, there is also no way to know what the proper market rate of exchange is. And so, forex intervention is a highly speculative and Quixotic adventure that should be avoided.

Except that American interest rates are artificially high and with Iraq winding down, a strengthening economy and Europe headed into recession the dollar will inevitably rise.

Posted by Orrin Judd at September 30, 2003 11:23 PM

As I've said before, the Japanese just don't understand the concept of money, never have.

Few people who do understand money will agree with Orrin that US interest rates to "too high," whatever that means. The US is awash in unusable capital, and that's a new thing under the sun.

Lowering the interest rates would not, we must presume, soak up the loose money to any economically useful purpose.

Posted by: Harry Eagar at October 1, 2003 10:58 PM

I'm no economist, but I believe classical economic theory posits that it is impossible to have excess dollars and deflation at the same time.

Posted by: oj at October 1, 2003 11:33 PM

Well, we don't have deflation, so that's not a problem.

We have a split economy, part rising, part collapsing.

Some of the same factors that preceded the crashes of 1929 are present today, but the circuit breakers now did not exist then. However, the whole system has gotten a lot more complicated, with more players by an order of magnitude or maybe two.

Classical economic theory never was any good when applied to an economy it was prepared for; to expect anything out of it during entirely novel circumstances is asking a lot.

Posted by: Harry Eagar at October 2, 2003 3:33 AM


The food you eat, the clothes you wear and the house you live in will all be cheaper ten years from now--that's deflation.

Posted by: oj at October 2, 2003 9:04 AM