pms' question on Japan

Greg Nowell GN842 at CNSVAX.Albany.Edu
Wed Oct 14 19:22:15 PDT 1998

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

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