RK:

Now, contrast all this to the yen. Even at its highest nominal level in 2012, the real (price-adjusted) yen was a few percent BELOW its quarter-century average by the OECD's consumer price measure and 14% BELOW its quarter-centuiry average using the OECD unit labor cost measure. Using the Bank of Japan measure (consumer prices), the yen at 90/$ is 15% BELOW its quarter-century average. During 1986-2012, the real yen has spent two-thirds of its time no more than 10% above or below its long-term average. So, suppose the BOJ set a rate at Y100/$. That would be so far below its longterm real value, and such a challenge to its competitors, that, sooner or later, I believe it would be highly likely to invite speculators to challenge it.
If, in a move more like the SNB's, the BOJ put a ceiling at Y75 or Y80, it would have a greater chance of success--at least for a while.

To sum up: just because the SNB succeeded in defending a ceiling at an OVERvalued level doesn't mean the BOJ can defend a ceiling at an UNDERvalued level.

MM:

Well, it seems we can't agree on the final 10%. It is irrelevant for the conceptual question if your currency is far off its equilibrium exchange rate or not.
Ceteris paribus, the market cannot "speculate" against a central bank that is willing to print potentially unlimited amounts of its own currency, buy USD, and sterilize the USD it acquires by buying T-bills or other USD assets (hence the idea of a sovereign wealth fund for Japan). Any survey of the literature on speculative attacks shows that problems only arise if a central bank could run out of reserves, which can only happen if an overvalued exchange rate is defended against speculation (see e.g. Lucio Sarno and Mark P.
Taylor. 2002. The economics of exchange rates.
Cambridge: Cambridge University Press).

What matters, I'll grant you, is whether the US would tolerate this approach, because presumably other Asian countries would follow suit and devalue their currencies as well.

--Mark

Mark S. Manger
Assistant Professor
Munk School of Global Affairs | University of Toronto Observatory Site | 315 Bloor Street West | Room 212
Toronto, ON M5S 0A7
www.munkschool.utoronto.ca/mga

JOIN THE GLOBAL CONVERSATION