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Talking Down the Yen
Subject Exchange Rates
Topic International Finance
Key Words Appreciation, Depreciation, Exchange Rates
News Story

On the eve of the Evian summit of G8 industrial nations, Japanese Prime Minister Junichrio Koizumi is suggesting that the Japanese yen should be much weaker in terms of other countries currencies than it is. He based his statement on the current sluggishness of the Japanese economy. Koizumi referred to government statistics showing that GDP growth in Japan fell to almost zero in the first quarter of 2003. Even with this weak economy, the yen has risen strongly in relation to the dollar in recent months.

Based on his recent remarks it is very likely that Koizumi is using this opportunity to warm up for the upcoming meeting of G8 leaders. This meeting will give him a forum to discuss his plans and ask other countries for help in providing a strong economic recovery for the Japanese economy. The sluggish economy has forced much change to the economy and the prime minister would like to see the yen depreciate to ease the burden of structural change similar to the depreciation of the pound and the dollar when the UK and the US worked on economic reforms.

In other actions to keep the yen from strengthening to rapidly, the Japanese government secretly sold in the neighborhood of $20 billion worth of yen on the world market. The increased supply of yen served to keep the yen weaker than it would otherwise have been. The Bank of Japan is expected to publish figures soon that will show that the government ordered further intervention and actually sold more yen in the market since the $20 billion sale.

A representative for the Prime Minister, Yu Kameoka, has denied any change in policy by the Japanese government. "He was just commenting on the facts," Kameoka said. To the extent that the prime ministers "jawboning" and the yen sales by the Bank of Japan are successful, the Japanese economy would experience an increased demand for their manufactured products, providing support for the economy's fragile recovery.

(Updated June 2, 2003)

Questions
1.

What does the term "jawboning" mean?

2. Explain why a depreciating yen makes Japanese products cheaper to the rest of the world.
3. Explain why the sell of yen by the Bank of Japan will keep the exchange rate lower.
Source David Piling, " Koizumi Tries to Talk Down Strong Yen," Financial Time Online, May 29, 2003.

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