C. Liu,
You make the point that Japan should institute a regime of more inflation to stimulate demand. This makes theoretical Keynesian sense but is problematic. It seems to me that the voodoo economics of the supply-siders "worked" (which is to say that the economy expanded after its institution, despite the obvious flaws in the logic) because of one simple fact that should be central to any Marxist interpretation of events: The capitalists have all the money. If capitalists don't loan out their money, the economy grinds to a halt. The regime of almost continuously falling interest rates and inflation instituted by Volcker/Greenspan has made lenders rich and eager to be richer. With Japanese rates at near-zero and inflation low, lenders cannot expect the environment to do anything but deteriorate. The higher the inflation rate, the lower the value of bonds, etc. This devaluation of debt assets might be catastrophic at a time when Japan is desperately trying to generate liquidity, their fabled savings rate having been pissed away by criminally stupid banking practices. The truth is that absent a socialist form of finance, the Japanese need their capitalists to part with more money or they will slide into depression. Therefore, they have to encourage lenders to lend even, I think, at the expense of "encouraging" (if we can term inflation an "encouragement" of any kind) consumers to spend.
Your point about currency valuations is not entirely clear to me but I will add this observation: I had always assumed that the Japanese only pursued a strong yen policy because a weak yen made their trading partners angry. However, when the yen began to look like it might go to 150 (running up to the Russian crisis) the Nihon Kezai Shimbun reported a survey of business leaders as to their opinion of an ideal yen/dollar value. They picked a value corresponding to a *stronger* yen than existed at the time (about 130, if I remember). The reasons for their attitude was made clear: Japan is a large-scale importer of raw materials. If, while commodity prices were falling, the Japanese business community wanted a stronger yen, will they not clearly want one now that commodity prices have seemingly bottomed out?
peace