Can Japan Assassinate The Yen?
However, they have made clear that Japan sees another way out of its decades-long slump: weaken the yen. While Abe has denied that the Bank of Japan's decision was designed to weaken the country's currency deliberately, the yen fell to its lowest level in seven years following the announcement. The Financial Times reported that it had fallen 20 percent against a trade-weighted basket of currencies as of mid-November, relative to two years prior, before strengthening a bit after the recession was announced. (2)
This raises the question of whether a country really has the power to wreck its own currency. Can Japan kill the yen through internal action, or could external factors keep such a plan from succeeding regardless of how the central bank behaves? There is no clear answer, at least so far.
Why would Japan want to wreck the yen in the first place? There are several potential benefits of doing so. First, Japan has struggled with deflation for an extended period. Though recently the country has managed a small amount of inflation, a falling currency should help spur this trend dramatically. In fact, accelerating inflation to the target of 2 percent in 2015 is the stated goal of Japan's increased quantitative easing.
Depreciated currency will also make Japanese exports more attractive. Japan's economy was long export-based, and its net trade surplus exerted natural upward pressure on the yen. It has recently flipped to being a net importer because of the need to import energy in the wake of the country's decision to power down its nuclear reactors. Now the country is talking about turning the reactors back on. In early November, the governor of the Kagoshima prefecture approved the restart of two reactors at the Sendai nuclear plant, removing the last legal barrier to the resumption of activity. Most observers expect those reactors to power up sometime next year. If this happens, and leads the way to other reactors turning on as well, Japan could quickly flip back to an export economy, and the yen could begin climbing again. By taking pre-emptive measures to knock down the value of the yen, Japan can export more and grow the country's economy in the meantime.
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