Home > Macro/Monetary Theory > “Japan Battles Soaring Yen”

“Japan Battles Soaring Yen”

That was the headline on today’s Wall Street Journal.  This is a preview of what’s to come here.  By the way, the fact that Japan is a little farther down this road than we are is propping our currency up for the time being but this raises other disturbing issues.  For instance, the way our global monetary system works causes every country to want to devalue their currency relative to other countries.

Any effort by Japan to change the direction of the yen through direct intervention in foreign-exchange markets would be unlikely to succeed without the support of the U.S. and Europe. But neither appears likely to lend a hand—something that could increase tensions among three of the world’s largest economies.

Washington and the EU have both welcomed gradual declines in the value of the dollar and the euro, which have helped make their exports more competitive. The Obama administration, while it formally endorses a strong dollar, hasn’t objected as the currency has weakened.

In fact, the U.S. needs a weaker dollar if it is to come close to meeting President Barack Obama’s goal of doubling exports. Fred Bergsten, director of the Peterson Institute for International Economics in Washington, said U.S. policy is to “welcome the gradual decline of the dollar, but not be seen as pushing the dollar down.”

This is a sort of prisoner’s dilemma.  And everyone knows that the only way to resolve a prisoner’s dilemma is to form some kind of governing body to impose the correct behavior on the players (it’s not necessarily the only way but it’s what they will do).  Coincidentally, at the top of page two today was a story titled “Inching Toward World-Wide Accord on Bank Rules.”

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