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Modern Currency Wars: The United States versus Japan

  • McKinnon, Ronald

    (Asian Development Bank Institute)

  • Liu, Zhao

    (Asian Development Bank Institute)

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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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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  1. Alan G. Ahearne & Naoki Shinada, 2005. "Zombie Firms and Economic Stagnation in Japan," Hi-Stat Discussion Paper Series d05-95, Institute of Economic Research, Hitotsubashi University.
  2. Habib, Maurizio Michael & Stracca, Livio, 2011. "Getting beyond carry trade: what makes a safe haven currency?," Working Paper Series 1288, European Central Bank.
  3. 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.
  4. Ranaldo, Angelo & Söderlind, Paul, 2009. "Safe Haven Currencies," CEPR Discussion Papers 7249, C.E.P.R. Discussion Papers.
  5. Gabriele Galati & Alexandra Heath & Patrick McGuire, 2007. "Evidence of carry trade activity," BIS Quarterly Review, Bank for International Settlements, September.
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