I almost completely agree with the assessment of Japan's economy by Richard Katz here, but it contains a conceptual error: Of course the Yen exchange rate in the sense of deliberate depreciation is in Abe's control. All it would take would be to legislate that MOF declares an exchange rate target, and then further change laws that the BOJ has to support this target by printing unlimited amounts of Yen, or to simply obtain the "cooperation" of the BOJ by threatening to do so.

The Swiss central bank has just successfully demonstrated that this works by declaring that the Swiss franc would not be allowed to appreciate beyond 1.20Fr to the Euro.

The only theoretical risk of such a policy is imported inflation, but in Japan's case that is, well, purely theoretical for now.

In fact this is likely to work for Japan, as argued by the Deputy Governor of the Swedish Riksbank, Lars O.
Svensson: "Escaping From A Liquidity Trap And
Deflation: The Foolproof Way And Others," Journal of Economic Perspectives, 2003, v17(4), 145-166.

But as Richard correctly points out, that's no substitute for serious structural reform.

Best,

Mark

Mark S. Manger
Assistant Professor

Munk School of Global Affairs | University of Toronto Observatory Site
mark.manger[at]utoronto.ca
www.munkschool.utoronto.ca/mga

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