Original text of thread snippet
>>will be become urgent the next time the FOMC's international >>concerns
come
>>into conflict with its domestic ones.
One part of B DeLong's comments
>Was it really a full decade ago that Larry Summers and I wrote about
>how it would be unwise to push trend inflation far below five >percent
because of the danger that one might then find that a single >adverse shock
would get the economy wedged into such an unpleasant >position?
If memory serves, G7 countries took turns exporting deflation to each other over the past decade or so through the value of their currencies. The UK pound devalued against the Euro basket. By the time the basket became a real currency, the euro became undervalued against the dollar. Meanwhile, in 1993-4, 1995 and 1998-2000, the US dollar significantly devalued against the yen.
Since the 1970s consistent devaluation of the USD versus the JPY has been strategic monetary policy, but the markets and players picked up on the trend: never, long term, bet against a cheaper dollar vs. the yen (unless you want to become a rogue trader and fugitive from justice).
Some argue that markets make much of the information about the US's twin deficits vs. Japan's trade surplus, but it would seem more likely they are just making much of the fact that the US hardly ever intervenes to prop up the dollar against the yen. It would be hard to argue how any economic, fiscal or monetary fundamentals in Japan except the trade surplus with the US justify the yen's high value against the USD or the Euro.
The international concerns vs. domestic ones must be seen in light of this situation: the euro is undervalued against the dollar, which in turn is undervalued against the yen. And the dollars like the Canadian and Australian ones are undervalued against them all.
The only yen economy in the world has serious deflation. It seems it's Japan most seriously wedged in a very unpleasant position. If it cheapens the yen at all it arouses protectionism and trade strategizing in the US (recently seen in the steel tariffs, which are designed to create price inflation in the US and export deflation and distress to the rest of the world). Also, Japan then gets blamed for the lack of viability in current E. Asian and SE Asian monetary policies vis-a-vis the USD.
Charles Jannuzi