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Japan’s pointless intervention

Currency-market intervention cannot boost Japan’s exports in the short term. Nor does it tackle the country’s deeper economic malaise.

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 course, is that a weaker yen will help the country’s exporters, whose sales have slumped at a time when Japan’s economy as a whole is suffering another prolonged bout of stagnation.

Yet many in Japan regard the currency intervention as doubly useless: it is unlikely to work and it is going about the problem in completely the wrong way. To begin with concerns about the efficacy of the intervention, it is first worth considering the scale of the BoJ’s initial success. On September 15, the rate stood at Y108/$. Secondly, in the weeks after this year’s intervention the yen crept back up to 84 against the dollar.

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