Japan’s intervention in the currency markets on September 15 caused a moment of excitement not just among currency traders but also for those concerned about the country’s economic woes. The yen ended that week trading at over 85 to the dollar, having started below 83, so the government appeared to have achieved its short-term objective of weakening the currency.
But that wasn’t enough: a couple of weeks later the Bank of Japan brought back zero interest rates. This prompted IMF chief Dominique Strauss-Khan to warn of the pitfalls of competitive devaluations and the impact they may have on the global economy.
The BoJ’s theory, of...
