Sunday, January 10, 2010

The only way to end Japanese deflation is to repeg the yen to the dollar

A particular interest of mine (and of Bernanke's) is Japanese monetary policy. Below is a letter published in November by the FT:

Yen devaluation is not whole answer
Published: November 20 2009 02:00
From Mr Christopher T. Mahoney.
Sir, Marc Ostwald states that “a sharp devaluation of the yen would appear to be a textbook way of dealing with some of Japan's problems” (“The Japanese bond outlook is not as dire as it appears”, Insight, November 17). Clearly this is part of the short-term solution to Japan’s growth and deflation problems. But, as Stanford professor Ronald McKinnon has argued for some time, the long-term solution must involve a stabilisation of the nominal relationship between the yen and the dollar (as existed for 25 years under Bretton Woods). This would break deflationary expectations and allow Japan to import US inflation. Most western economists would agree that the Bank of Japan's monetary policy since 1989 has been inept. A dollar-support policy would force the BoJ to engage in quantitative easing on a scale not yet seen. A return to a dollar peg (formal or informal) would clearly be preferable to what we have witnessed over the past two decades.
Christopher T. Mahoney,New York, NY, US

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