pms' question on Japan

[Greg Nowell]

I read the analysis and was mystified how anyone could
construe a cut in US interest rates as an attack on the
yen.  The traditional thinking--still in force in
Brazil, with enthusiastic US backing--is that you raise
interest rates to support a currency, and lower them to
weaken it.

Again, you have to decide what "they" think is in
"their" best interest.  The weak dollar gets them
greater bank liquidity on dollar loans (because of yen
reserves) and also falling interest rates raise the
asset value of existing fixed-rate bonds, which also
helps Japan banks.  The weak US dollar hurts Japanese
imports and indirectly denies Japanes banks that money.

So you can say that US policy is "anti" Japan if rates
are raised, "anti" Japan if rates are lowered, and
"anti" Japan if rates stay the same (doing nothing).
And vice versa.

Notwithstanding which, if the argument is, that cutting
the US rate strengthens the US dollar (which infact has
weakened rather dramatically in the past week), then it
is counter to the usual thinking, and counter to the
experience of the past week.   This is a rather
fundamental thing to "bollix up" and calls into
question the coherency of the rest of the analysis.
-gn

--
Gregory P. Nowell
Associate Professor
Department of Political Science, Milne 100
State University of New York
135 Western Ave.
Albany, New York 12222

Fax 518-442-5298