March 28, 2024

Dollar Breaches 100 Yen

The United States dollar broke through the important 100-yen level on Thursday for the first time in four years, seeming to illustrate progress in the Japanese authorities’ new efforts to lift the economy out of deflation.

After years of Japan’s struggling to turn its faltering economy around, Prime Minister Shinzo Abe has made beating deflation a central point of his economic policy since taking office in late December.

Last month, the Bank of Japan announced a decisive break with its earlier policies. Instead of focusing on keeping overnight interest rates close to zero – which seemed to be having little effect in reviving growth – the central bank aimed to double the amount of money in circulation, seeking to produce annual inflation of about 2 percent.

That policy now seems to be bearing fruit as money pouring into the economy weakens the yen against the dollar and other world currencies. The yen’s move is germinating inflation in an economy that has long been moribund, in the process delivering a competitive boost to the country’s big exporters.

The Japanese government is not overtly targeting a lower yen rate – something that could raise tensions with other exporting nations like the United States. And while the lower yen is good for Japan’s exporters, it may be less good news for United States’ exporting companies.

Nevertheless, the promise to drastically change Japan’s economic policy and end the long, debilitating era of deflation has caused the dollar to rally for much of this year, and on Thursday it finally broke through the 100-yen level.

By midafternoon in New York, the dollar was valued at 100.53 yen.

The efforts by the Bank of Japan to continue to flood the economy with liquidity is likely to keep downward pressure on the yen in the coming months. The central bank is following an asset purchase program to inflate the economy by aggressively buying longer-term bonds and doubling its government bond holdings in two years.

The depreciation of the yen may be a step in the right direction as the authorities try to fuel some growth. However, Japan still faces many stiff challenges until it breaks out of its period of deflation. It has an aging and shrinking population and cumbersome regulations that make the economy inefficient, and it is not clear that monetary policy alone can end stubborn deflation in Japan.

As he has tried to put a new focus on reviving the economy, Mr. Abe fought with the central bank’s former leaders over setting the 2 percent inflation goal. Mr. Abe’s pressure in the end led to the resignation of the bank’s previous governor, the moderate Masaaki Shirakawa. His departure led to the appointment of Haruhiko Kuroda, who shares Mr. Abe’s economic philosophy.

As it pursues its new policy, the Bank of Japan is buying longer-term government bonds, lengthening the average maturity of its holdings to seven years from three years and expanding Japan’s monetary base to 270 trillion yen by March 2015.

In this way, the bank will buy about 7 trillion yen in bonds each month, equivalent to over 1 percent of its gross domestic product. That is almost twice the bond purchases of the United States Federal Reserve Bank.

Article source: http://www.nytimes.com/2013/05/10/business/dollar-breaches-100-yen.html?partner=rss&emc=rss

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