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Modern Currency Wars: The United States versus Japan

Author

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  • McKinnon, Ronald

    (Asian Development Bank Institute)

  • Liu, Zhao

    (Asian Development Bank Institute)

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.

Suggested Citation

  • McKinnon, Ronald & Liu, Zhao, 2013. "Modern Currency Wars: The United States versus Japan," ADBI Working Papers 437, Asian Development Bank Institute.
  • Handle: RePEc:ris:adbiwp:0437
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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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    References listed on IDEAS

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    1. Hyun Song Shin & Masazumi Hattori, 2009. "The Broad Yen Carry Trade," World Scientific Book Chapters,in: Globalization And Systemic Risk, chapter 11, pages 169-189 World Scientific Publishing Co. Pte. Ltd..
    2. Ronald McKinnon & Gunther Schnabl, 2003. "Synchronised Business Cycles in East Asia and Fluctuations in the Yen/Dollar Exchange Rate," The World Economy, Wiley Blackwell, vol. 26(8), pages 1067-1088, August.
    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. Angelo Ranaldo & Paul Söderlind, 2010. "Safe Haven Currencies," Review of Finance, European Finance Association, vol. 14(3), pages 385-407.
    5. Gabriele Galati & Alexandra Heath & Patrick McGuire, 2007. "Evidence of carry trade activity," BIS Quarterly Review, Bank for International Settlements, September.
    6. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Akihito Asano & Rod Tyers, 2016. "Japan's oligopolies: potential gains from third arrow reforms," CAMA Working Papers 2016-03, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    2. repec:krk:eberjl:v:2:y:2014:i:2:p:21-30 is not listed on IDEAS
    3. Akihito Asano & Rod Tyers, 2015. "Third Arrow Reforms and Japan’s Economic Performance," Economics Discussion / Working Papers 15-17, The University of Western Australia, Department of Economics.
    4. Kawai, Masahiro, 2015. "International Spillovers of Monetary Policy: US Federal Reserve's Quantitative Easing and Bank of Japan's Quantitative and Qualitative Easing," ADBI Working Papers 512, Asian Development Bank Institute.

    More about this item

    Keywords

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

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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