C. Nowell,
My feeling was that Japanese dollar assets are mostly bank-to-bank loans and U.S. treasuries (also "loans") needed for settlements. I also believe that Japanese banks tend to try and borrow in Japan and lend in the U.S. as an interest rate arbitrage. Ultimately it doesn't matter since all dollar lending has to be reconciled in yen. It's true, therefore, that a strengthening dollar increases the total loan exposure in a Japanese bank's portfolio without any additional lending being done However, my feeling is that the dollar assets are the strongest on Japanese books and that these books are not terribly open anyway, so the effective need for increased yen reserves is not so acutely felt. It also seems to me that a strengthening U.S. bond market (which increases the value of the dollar, in the short term) creates capital appreciation of dollar assets. Since these assets are very liquid, I think what might very well be going on now is that the Japanese are liquidating dollar assets, betting that the bond market has gotten ahead of itself and that with a rising Japan premium and lower U.S. interest rates, they can do better on the forex markets than with holding dollar assets. Not only that, but the BOJ is now swapping foreign currency reserves directly with Japanese banks. In doing this and while doing this, the BOJ is also encouraging Japanese banks to get dollar assets off their books altogether. What Greenspan may be doing is reducing the "moral hazard" created from the fact that Japanese banks can borrow cheap in Japan and buy high-quality assets in the U.S.. One of the problems that almost all the failed economies have had is interest-rate speculation by bankers - swapping their overvalued currencies for more fairly valued and liquid currencies.
While all this theoretically stimulates Japanese lending, the fact is that the Japanese are probably getting rid of the best assets (dollar) on their books, and still doing precious little about getting low-quality Japanese assets off their books. This makes the present stimulus a one-time deal to the extent it really does free up credit.
Next we have to deal with the issue that Japanese interest rates are so absurdly low they represent no premium at all to the perceived risk in an economy that's so sluggish. I think the Japanese liquidity trap is going to kill any credit expansion they have planned.
peace