The Blessing of a Strong Currency

By David Howden and Brenna Sanae Kajikawa

To hear some commentators talk, one would think that America's trade-deficit woes would be miraculously erased with a swift devaluation. A too highly valued greenback makes imports "too cheap" and incentivizes Americans to buy from their foreign competitors. The corollary is that the expensive dollar is making American exporters unattractive to the rest of the world. The result is a trade deficit, whereby Americans buy more imports than they export each year, a phenomenon that seems to have gotten especially worse since the early 1970s.

Yet two effects of the standard relationship between a weak currency and a country's economic health bear commenting on. First, is it true that a weakened exchange rate makes one's exports cheaper? Second, are there harmful secondary effects from pursuing such a weak-currency policy? Let us address both points in turn, using Japan and the yen as an example.

A strong currency is typically seen as a double-edged sword. While most people enjoy looking at their bank statement and seeing lots of money, they only do so if that money means something. Strong currencies enable money holders to enjoy more goods that are imported — trips to foreign lands, or exotic electronics become more affordable. The flip side is that the producers of these goods — the foreigners with the relatively strengthening currency — are typically viewed as being at a cost disadvantage.

Some anecdotal evidence from Japan… (Read more)

Source: Mises.org

Secretary Geithner to Travel to China and Japan Next Week

Trip to Highlight Issues Including State of the Global Economy, Stronger Growth and Increased Pressure on Iran

 

WASHINGTON – The U.S. Department of the Treasury today announced that Secretary Tim Geithner will travel to Beijing, China and Tokyo, Japan January 10-12, 2012, for meetings with senior government officials in both countries to discuss the state of the global economy, policies to strengthen global growth and other economic issues of mutual importance. Secretary Geithner will also discuss our continued coordination with international partners in the region to increase pressure on the Government of Iran, including financial measures targeting the Central Bank of Iran.

 

On Tuesday, January 10, Secretary Geithner will arrive in Beijing for a meeting with Chinese Vice Premier Wang Qishan. The following day, he will meet with Premier Wen Jiabao, Vice President Xi Jinping and Executive Vice Premier Li Keqiang to discuss measures to promote continued economic growth and level the playing field for U.S. workers and firms. The Secretary’s visit to Beijing comes ahead of Vice President Xi’s visit to Washington later this year.

 

On Thursday, January 12, the Secretary will be in Tokyo, Japan for meetings with Prime Minister Yoshihiko Noda, Finance Minister Jun Azumi and other senior government officials to confer on the U.S. and Japanese economies and cooperation on efforts to support strong, sustainable and balanced global growth.

 

Additional details will be announced in the coming days.

U.S.-Japanese Relations before WWII

By Percy L. Greaves Jr.

 

Relations with Japan had been strained for some time. The Roosevelt administration was fully aware of Japan's dependence on imports. Yet, as we have seen, it had terminated America's long-standing commercial treaty with her. After January 1940 Japan had to ask permission on a case-by-case basis whenever she wanted to import from the United States. In July 1940 the administration had further prohibited exports to Japan by requiring her to get a license to purchase aircraft engines and strategic materials. (When sale of aviation gas, defined by the United States as 86 octane or higher, was embargoed on July 1, 1940, she had contrived a way to use 76 octane in her planes.) The administration was tightening an economic noose around Japan's neck bit by bit, forcing her to look elsewhere for the supplies and materials she had been accustomed to buying from the United States.

 

The Japanese had considerable commercial interests in Southeast Asia, especially in French Indochina (now comprising the states of Vietnam, Laos, and Cambodia). After France fell in June 1940, Japan had negotiated with the Vichy government of unoccupied France for permission to occupy French Indochina, to take over bases there, and to maintain order. The rather helpless Vichy government had agreed. As trade with the United States became more difficult, Japan's interests in Indochina gained in importance and she turned more and more in that direction for the foods and raw materials she needed. Trade pacts concluded later with Indochina assured Japan of uninterrupted supplies of rice, rubber, and other needed raw materials.

 

US Ambassador Grew in Japan kept Roosevelt fully advised of her precarious economic situation and urgent need for imports. Chief of Naval Operations (NCO) Stark had warned the president of the danger of imposing an oil embargo on Japan. Stark had "made it known to the State Department in no uncertain terms that in my opinion if Japan's oil were shut off, she would go to war." He did not mean… (Read more)

 

Source: Mises.org

Quantitative Easing and Bank Lending: Evidence from Japan

David Bowman, Fang Cai, Sally Davies, and Steven Kamin

Abstract:  Prior to the recent financial crisis, one of the most prominent examples of unconventional monetary stimulus was Japan's "quantitative easing policy" (QEP). Most analysts agree that QEP did not succeed in stimulating aggregate demand sufficiently to overcome persistent deflation. However, it remains unclear whether QEP simply provided little stimulus, or whether its positive effects were overwhelmed by the contractionary forces in Japan's post-bubble economy. In the spirit of Kashyap and Stein (2000) and Hosono (2006), this paper uses bank-level data from 2000 to 2009 to examine the effectiveness in promoting bank lending of a key element of QEP, the Bank of Japan's injections of liquidity into the interbank market.

We identify a robust, positive, and statistically significant effect of bank liquidity positions on lending, suggesting that the expansion of reserves associated with QEP likely boosted the flow of credit. However, the overall size of that boost was probably quite small. First, the estimated response of lending to liquidity positions in our regressions is small. Second, much of the effect of the BOJ's reserve injections on bank liquidity was offset as banks reduced their lending to each other. Finally, the effect of liquidity on lending appears to have held only during the initial years of QEP, when the banking system was at its weakest; by 2005, even before QEP was abandoned, the relationship between liquidity and lending had evaporated.  (Read on)