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Posts Tagged ‘yen’

Central Bankers Are Gaslighting Us about the “Strong Dollar”

Posted by M. C. on September 21, 2022

A perfect example of how this rhetoric works comes from the Bank of Japan’s Governor Haruhiko Kuroda in July. As the yen was really starting to slide against the dollar, he opined that “This is not so much a yen weakness as a dollar strength.” Kuroda said these words after years of negative rates, and right after the BOJ had doubled down on buying up “vast quantities of bonds” to force down interest rates and borrowing costs. Kuroda’s words also came weeks after the Swiss National Bank raised interest rates for the first time in 15 years.

https://mises.org/wire/central-bankers-are-gaslighting-us-about-strong-dollar

Ryan McMaken

On February 8, the Japanese yen fell to a 24-year low against the dollar, dropping to 143 yen per dollar. Not much has changed since then with the yen hovering between 142 and 144 per dollar. In September of 2021, one only needed 109 yen to buy a dollar. 

Overall, the yen has dropped 21 percent against the dollar over the past year, yet Japan’s central bank apparently has no plans to change course. Nor should we expect it to do so.  Japan’s debt load has become so immense that any attempt to raise interest rates or otherwise tighten monetary conditions would prove extraordinarily painful.  So, it’s no surprise the BOJ is now positioned to become the world’s last central bank clinging to negative interest rates

It’s Not Just Japan

The yen is sliding the most among the world’s major currencies, but it’s not alone. Over the past year, the euro has fallen 14 percent against the dollar while the pound has fallen 13 percent. Even the Chinese yuan, which is subject to even more currency manipulation than the West’s central banks, has fallen against the dollar. 

All of this means is we’re hearing a lot about the supposedly “strong dollar,” but not in a good way. Rather, the reputedly strong dollar is being discussed in a context of how harmful it is, and how we must explore ways to make the dollar weaker as soon as politically feasible. 

Such talk must be heartily opposed, of course, as the dollar is not “too strong,” Rather, talk of the dollar’s “strength” is not really about the dollar at all. It’s about the weakness of other currencies and it’s about how other central banks have embraced monetary policy that’s even worse than that of the US’s Fed. If, say, other national governments and central banks are concerned about the dollar being too strong, those institutions are welcome to embrace policies that will strengthen their own currencies. 

Instead, we’ll hear about how the Fed must “do something” to weaken the dollar through more easy money and thus stick it to Americans who hold dollars by lessening their purchasing power.

“We Didn’t Inflate Currency X Too Much, it’s All the Dollar’s Fault”

A perfect example of how this rhetoric works comes from the Bank of Japan’s Governor Haruhiko Kuroda in July. As the yen was really starting to slide against the dollar, he opined that “This is not so much a yen weakness as a dollar strength.” Kuroda said these words after years of negative rates, and right after the BOJ had doubled down on buying up “vast quantities of bonds” to force down interest rates and borrowing costs. Kuroda’s words also came weeks after the Swiss National Bank raised interest rates for the first time in 15 years. That was just one more example of how dovish the ECB was compared to other banks, and yet, Kuroda then manages to say with a straight face that this is all about the dollar. 

This is the sort of talk we should learn to expect on the “strong dollar.” The central banks who are devaluing their currency, aren’t to blame, you see. It’s the dollar’s fault. 

Other critiques of the strong are less explicit on this last point and are more just in the business of priming the pump to convince us all that a relatively less-weak dollar is a bad thing. 

Blaming a “Strong” Dollar Rather than Weak, Inflated Currencies 

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Government Intervention into International Currency Exchange Rates: Japan as a Case Study

Posted by M. C. on September 18, 2022

However, monetary policy interventions introduce other distortions into the economy which can have severe economic consequences, as illustrated by Japan’s lost decades after the Plaza Accord.

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https://mises.org/wire/government-intervention-international-currency-exchange-rates-japan-case-study

Mihai Macovei

The recent hefty depreciation of the yen to a twenty-four-year low against the dollar has raised eyebrows due to the yen’s traditional safe haven role in times of turmoil, such as the war in Ukraine. The yen’s decline had already started when major central banks signaled a tightening of monetary policy to fight inflation while the Bank of Japan (BoJ) doubled down on its loose monetary policy and zero target for ten-year bond yields. The depreciation accelerated further when oil and gas prices surged, weakening Japan’s terms of trade.

Mainstream analysts got wary about the yen’s tumble and its negative impact on import prices and consumption, but recommended the BoJ to continue its ultraloose monetary policy in order to reflate the economy and support growth. What these analysts fail to grasp is that in a longer-term perspective, the yen’s value relative to other currencies is anchored in economic fundamentals driven by monetary developments and its purchasing power.

Since the sharp appreciation of the yen following the Plaza Accord in 1985, the currency has preserved its relative strength versus the dollar despite Japan’s ultraloose fiscal and monetary policies. This is because money creation has run at a slower pace in Japan than in the US, as the Plaza agreement ushered in Japan’s lost decades, illustrating well how disruptive government interventions in foreign exchange markets can be.

The Plaza Accord

For more than three decades, following its sudden appreciation as a result of the 1985 Plaza Accord (graph 1), the yen has followed a steady path versus the dollar. The Plaza agreement between G-5 countries—the United States, West Germany, France, Japan, and the United Kingdom—marked the first large experiment in international monetary cooperation to revalue the exchange rate system.

At the behest of the United States, which wanted to devalue the dollar and reduce the trade deficit, the five central banks agreed to intervene in currency markets to rebalance international trade and growth. The perceived overvaluation of the US dollar was the result of relatively high interest rates promoted by the Fed during 1980–82 to quell inflation, combined with Ronald Reagan’s expansionary fiscal policy during 1981–84, which caused capital inflows and an appreciation of the dollar.

High budget deficits together with buoyant domestic demand swelled the trade deficit, producing the famous 1980s “twin deficits.” In reality, the exchange rate was not the problem, but US fiscal profligacy and excessive money supply expansion, which exceeded 12 percent in 1983. Instead of fixing domestic policies, the US government talked Japan and Germany into manipulating their exchange rates and increasing domestic demand. As Ludwig von Mises put it so aptly: “What governments call international monetary cooperation is concerted action for the sake of credit expansion.”

Graph 1: Japanese yen to US dollar spot exchange rate

picture1.png

Macovei 1

Following concerted interventions by central banks, the yen appreciated from about 240 units per dollar in September 1985 to 153 units in 1986. By 1988, the yen had almost doubled in value to an exchange rate of 120 units per dollar. Many analyses, including International Monetary Fund reports, concur that the significant government-driven appreciation of the yen sowed the seeds for Japan’s subsequent long-lasting economic debacle.

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