Will Tokyo intervene? Low dollar bad for Japan

As the dollar continues to drop against the yen, American exports become cheaper while Japanese exports look frightfully expensive.

With yesterday's interest rate cut to near zero, the U.S. now has a lower rate than the Japanese rate of 0.3. The interest rate cut will likely cause Japanese investors to abandon U.S. investments. According the the Wall Street Journal (12/15/08), Japan is only behind China as the world's largest investor in U.S. Treasuries.

They're not the only ones bailing. Most investors see the dollar as weak and are selling them in order to buy other currencies. (Then again, whenever the stock market takes a hit, investors run to the relative safety of the dollar and yen).

The Fed's plan to stimulate growth is to use quantitative easing, which means they are going to pour more money into the economy, even at the risk of inflation. Many economists feel that contracting the economy later in response to inflation is easier than pulling ourselves out of a deflationary situation. So their goal is to nip deflation before it spirals down.

Japan used quantitative easing in 2001 when it created money to directly buy Japanese stocks, bonds and asset-backed securities.

Will Tokyo intervene as their exports become less competitive? With the dollar at 88.78 yen, I imagine we are going to see action from Japan shortly.




The best explanation I saw of quantitative easing is from the Wall Street Journal (12/17/08): "it tackles the quantity of money in the financial system rather than its cost (the interest rate). I also translates into an increasing supply of U.S. dollars, potentially putting pressure on the currency because of an oversupply."