Re: Is Bernanke Behind The Rallies? Query to Barkley

[Michael Perelman <michael@xxxxxxxxxxxxxxxxx>]

Henry, could you elaborate on this?  Thanks.

On Thu, Jun 19, 2003 at 09:01:20PM -0400, Henry C.K. Liu wrote:
>
>   Japanese policy of keeping the yen?s exchange value lower than that
> dictated by market pressure has now become an attempt to eliminate
> domestic deflation.  But a below-market yen leads to a larger trade
> surplus in dollars, causing a net shrinkage in the yen money supply,
> thus shrinking the yen asset economy, leaving it with over-capacity and
> making yen assets less valuable.  What Japan is doing is investing in
> the dollar economy while dis-investing in the yen economy through its
> trade surplus. This is the real cause of deflation in Japan.
>
> To restore strong economic growth in Japan, deflation must be stopped.
> Under a central banking regime, the most straightforward way to stop
> domestic deflation is to force the yen to depreciate in foreign exchange
> value.  But this would go against market forces generated by Japan?s
> trade surplus.  Yet if Japan keeps the exchange value of the yen low
> merely to sustain its export prowess, it will continue to feed domestic
> deflation.  This is because the rate of shrinkage of the yen economy
> from a huge trade surplus denominated in foreign currencies, mostly
> dollars, is greater than the rise in yen money supply released by a
> reluctant central bank.
>

--
Michael Perelman
Economics Department
California State University
Chico, CA 95929

Tel. 530-898-5321
E-Mail michael@xxxxxxxxxxxxxxxxx