Central Bankers and “comfort zones”

This piece in the WSJ caught my eyes: “A Yen Too Weak Even for Japan”:

Japan has been celebrating the fall of the yen for the past two years. The currency is now reaching levels that could make policy makers wonder if they’ve gone too far.

The yen has cruised through 120 to the dollar, nearing the key 125 level that officials in Tokyo have signaled would be a tipping point for concern. Etsuro Honda, a top adviser to Prime Minister Shinzo Abe on economic policy, told The Wall Street Journal in November that if the yen weakens to 125 it would make him “nervous” and make him “stop and think, ‘is this OK?’”


With the yen already near the limits of their comfort zone, Mr. Abe and central bank Gov.Haruhiko Kuroda will find themselves in a difficult position.

Such “shortsightedness”! Look at the Yen/USD since exchange rates since the breakdown of Bretton Woods:

Yen stigma_1

The small “Abenomics upward squiggle” has taken the exchange rate closer to levels that prevailed for several years before the global crisis, when Japan was in “deflation mode”!

The funny thing is that the US has always eyed the yen with great suspicion. During the first half of the 1980s, the dollar appreciated enormously against all currencies except, you guess, relative to the yen. But when the Plaza Accord – an agreement between the governments of France, the US and the UK to depreciate the dollar in relation to the Japanese yen and German Deutsche Mark – was signed in September 1985, the yen appreciated as “agreed”. Notice that the DM only returned to the “starting point”. It appears the object of the exercise was to “clobber Japanese competitiveness”!

Yen stigma_2

Abe & Kuroda should ditch the “yen always has to appreciate” stigma. They´ll find themselves in a difficult position if they start worrying about “comfort zones” for the yen!

3 thoughts on “Central Bankers and “comfort zones”

  1. Pingback: TheMoneyIllusion » The euro is still far too strong

  2. Even more importantly, the BOJ should concentrate on growing Japan’s NGDP and let exchange rates fall where they may.

  3. Keep in mind that these are nominal exchange rates you’re charting. Japan has been in deflation (or noflation) for two decades now, while the rest of the world had 2% inflation and even higher. Here’s a chart of the yen’s real trade-weighted exchange rate, as calculated by the BoJ (and from the BoJ’s website):

    I can’t find pre-1980 data on the BoJ’s website but the BIS has nominal and real effective exchange rate indices going as far back as 1964. According to its index for Japan, the yen’s real exchange rate today is pretty much the same as its post-float exchange rate in 1973. So I can understand Etsuro Honda’s concerns.

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