We Can’t Make Japan Fix Its Economy

There’s something almost comical about the recent frustration over the Bank of Japan’s refusal to take action to lower the value of the yen, which has soared in the past month against the rest of the world’s currencies, including most obviously the dollar. The kind of action the bank would have to take to weaken the yen, after all, is precisely the kind of action it would have to take to jump-start the Japanese economy. And if it wasn’t going to take action to do the latter, it’s hard to see why we should it expect to act to do the former.

The impact on a country’s economy of the value of its currency is, of course, very complicated, primarily because any country is made up both of consumers, who like it when the currency is strong, making imported goods cheap, and producers, who like it when the currency is weaker, making their exports more affordable. But former Treasury Secretary Robert Rubin always said simply that a strong dollar was in the best interests of the United States, so you’re probably pretty safe to leave it at that.

But that doesn’t mean that the United States needs to be too obsessed with the recent fall of the dollar against the yen. In the first place, currency markets are markets, which means that they will occasionally overreact (as currency traders seem to have done to the news that the Japanese economy actually grew in the last quarter, albeit at a minuscule rate). In the second place, the dollar has remained strong against the world’s other major currencies. So concerns that a weak dollar will spark inflationary pressures are overplayed.

The Japanese, on the other hand, have reason to worry about the yen’s becoming too strong when their economy is still barely limping along. Much of Japan’s industrial production remains concentrated in export industries, and a too-strong yen will hurt them. At the same time, it might be tempting for Japanese leaders to see the value of the yen as a referendum on their economy. If they do, that’ll hold back the kinds of changes Japan needs.

The best chance the bank has of lowering the value of the yen–and it would be only a chance–would be to effectively print a lot of new currency. (It can’t act to manipulate interest rates, since rates are already near zero.) This would, of course, have an inflationary impact. But, as I’ve said here before (and as Slate’s Paul Krugman has said many times before), that would not be a bad thing. Japan remains caught in a liquidity trap, which means that even though money is effectively free, people are not using it to invest or spend. One way of encouraging them to do so is to make the cost of not spending higher than the cost of saving, which is to say making a commitment to inflation.

For all this, though, we need to stop expecting the Bank of Japan to step in: It is not interested in taking action either to spark growth or drive down the yen. The bank takes its devotion to inflation-fighting very seriously, and it does not believe the admittedly heretical view that sometimes a little inflation is not a bad thing. So if the United States is counting on the bank to help save the dollar, it should stop and look to something else. Maybe we could worry about the trade deficit.