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Modern Currency Wars: The United States versus Japan

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  • McKinnon, Ronald

    (Asian Development Bank Institute)

  • Liu, Zhao

    (Asian Development Bank Institute)

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    Abstract

    In 2013, through massive quantitative easing by the Bank of Japan (BOJ), the yen depreciated about 25% against the US dollar, stoking fears of Japan bashing by the US. However, this sharp depreciation simply restored the purchasing power parity of the yen with the dollar. Since 2008, quantitative easing by the BOJ has been similar to that carried out by the US Federal Reserve, the Bank of England, and the European Central Bank. So the BOJ can only be faulted as a currency belligerent if there is further significant yen depreciation. Led by the US, now all mature industrial countries are addicted to near-zero interest liquidity traps in both the short and long terms. Such ultra-low interest rates are causing lasting damage to the countries' financial systems, and to those of emerging markets, which naturally have higher interest rates. But exiting the trap creates a risk of chaos in long-term bond markets and is proving surprisingly difficult.

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    File URL: http://www.adbi.org/files/2013.10.10.wp437.modern.currency.wars.usa.vs.japan.pdf
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    Bibliographic Info

    Paper provided by Asian Development Bank Institute in its series ADBI Working Papers with number 437.

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    Length: 25 pages
    Date of creation: 10 Oct 2013
    Date of revision:
    Handle: RePEc:ris:adbiwp:0437

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    Keywords: currency wars; liquidity trap; quantitative easing; dollar versus yen; purchasing power parity;

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    1. Angelo Ranaldo & Paul Söderlind, 2010. "Safe Haven Currencies," Review of Finance, European Finance Association, vol. 14(3), pages 385-407.
    2. Habib, Maurizio M. & Stracca, Livio, 2012. "Getting beyond carry trade: What makes a safe haven currency?," Journal of International Economics, Elsevier, vol. 87(1), pages 50-64.
    3. Alan Ahearne & Naoki Shinada, 2005. "Zombie firms and economic stagnation in Japan," International Economics and Economic Policy, Springer, vol. 2(4), pages 363-381, December.
    4. Gabriele Galati & Alexandra Heath & Patrick McGuire, 2007. "Evidence of carry trade activity," BIS Quarterly Review, Bank for International Settlements, September.
    5. Masazumi Hattori & Hyun Song Shin, 2007. "The Broad Yen Carry Trade," IMES Discussion Paper Series 07-E-19, Institute for Monetary and Economic Studies, Bank of Japan.
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