Economics Stack Exchange Archive

Why doesn’t Japan’s central bank simply print more Yen to intentionally devalue the currency?

One of Japan’s biggest economic issues for the past few decades has been an overly strong Yen. While a strong currency has it’s benefits, the high value of the Yen inhibits exports and thus growth and jobs.

Why couldn’t Japan’s Central Bank simply slowly print more money and devalue the currency, in order to make export markets more lucrative?

Is this too difficult to do politically?

Answer 733

Japn did try monetary expansion. It didn't work. It's now tried extensive fiscal stimulus. Richard Koo of Nomura Securities argues that this has been successful: he contrasts the flatlining of Japanese GDP against the GDP contraction of the US during the Great Depression.

Japanese interest rates hit rock bottom around 1995. Between 1997 and 2005, the monetary base almost doubled:

Graph showing Japanese monetary base almost doubling, but GDP deflator declining

However, expanding M0 isn't enough to devalue a currency. The decades-old analysis that points to why this fails in a balance-sheet recession, is that when demand has collapsed, an expansion of narrow money simply does not feed through into an expansion of broad money: the classic description of this doomed attempt at monetary stimulus is of: "pushing on a piece of string".

Exchange rates are driven by broad money rather than narrow money. As deleveraging has continued in Japan over two decades, monetary stimulus hasn't done much good. And as of 2008, many other sovereign currencies, including some of the Yen's most important trading partners - US$, €, GB£ - all attempted a dash to devaluation too. And clearly they can't all devalue relative to each other.

Answer 731

Because it doesn’t want inflation, it wants 0% NGDP growth. It changed its policy overnight in 1990 causing two decade of never-ending recession in Japan.

How do we know it? BoJ intervened to keep monetary growth just there for the last 20 years extremely “successfully”. Here are some graphs.

Why? Probably for the same misguided reasons ECB is destroying European economy with single-minded focus on keeping inflation low right now. Interests of bondholders take priority over interests of everybody else according to BoJ and now ECB policy.

If BoJ did what you recommend it would result in much higher economic growth in Japan, and possibly a beginning of a genuine recovery, but then bondholders would need to deal with some non-zero inflation, and BoJ has its priorities where they are.

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