Tuesday’s NY Times (“Bank of Japan’s Move To Curb Yen Falls Short”):
History has proved it would be difficult for Japan to intervene successfully in foreign exchange markets on its own. Alan Ruskin, global head of G-10 foreign exchange strategy at Deutsche Bank in New York, said that central banks, including Japan’s, can only influence a small slice of currency movements while investors in the global foreign exchange market are daily turning over in excess of $3 trillion.
I got news for you, Alan. First of all, many countries around the world, from China to Latvia, have successfully pegged their currencies to the dollar or the euro.
Japan itself maintained a dollar peg from 1952 until 1971.
There is nothing to prevent the BoJ from announcing today the resumption of the dollar peg (at, let’s say Y100 = $1) and adopting the exchange rate as its sole policy anchor.
Not only would this prevent any further appreciation of the yen, but it would (finally) force the BoJ to engage in sufficient quantitative easing to: (1) depreciate the yen by 20% from Y85 to Y100; (2) import US dollar inflation (such as it is), thus decisively ending current and future deflation once and for all.
This is what Prof. Ronald McKinnon has been advocating ever since Japan entered deflation many moons ago.
To paraphrase Uncle Milty (and Uncle Ben), deflation is always and everywhere a monetary phenomenon.