Asymmetrical Information

You can't keep a good yen down

With the yen trading near 1 cent (for readers unfamiliar with Japan's currency fluctuations, this is a very high value, historically), The Economist's Global Agenda is wondering if the finance ministry has given up intervening in the currency markets to try to preserve the yen's artificially low value. And it argues that maintaining Japan's trade surplus isn't the only reason they were intervening:

Inflation is often described as the result of too much money chasing too few goods. Japan’s deflationary dilemma is the converse of this: not enough money, chasing too many goods. The Bank of Japan is doing its best to fix the first part of this problem, flooding the banking system with reserves. But as Andrew Smithers, an independent financial analyst, points out, this policy is doomed to failure, because one never really knows how much money is enough. The right amount will vary as the economy grows, and as the demand for money fluctuates. This is precisely the reason why most central banks target the price of money, in the form of short-term interest rates, rather than its quantity.

Japan cannot do this, of course: its short-term interest rates, at zero, are already as low as they can go. But as an alternative, Mr Smithers points out, it can still target the exchange rate—the foreign price of money. The finance ministry sold ¥20 trillion last year trying to keep the exchange rate steady. But, Mr Smithers argues, this did not go far enough. In an ideal world, the ministry would go on selling until the currency was thoroughly debauched and the economy decisively reflated.