Modern Currency Wars: The United States Versus Japan

25 Pages Posted: 10 Oct 2013

See all articles by Ronald McKinnon

Ronald McKinnon

Stanford University, School of Humanities & Sciences, Department of Economics (Deceased); CESifo (Center for Economic Studies and Ifo Institute for Economic Research) (Deceased)

Zhao Liu

Independent

Date Written: October 10, 2013

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.

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

JEL Classification: F31, F32

Suggested Citation

McKinnon, Ronald and Liu, Zhao, Modern Currency Wars: The United States Versus Japan (October 10, 2013). ADBI Working Paper 437. Available at SSRN: https://ssrn.com/abstract=2338340 or http://dx.doi.org/10.2139/ssrn.2338340

Ronald McKinnon (Contact Author)

Stanford University, School of Humanities & Sciences, Department of Economics (Deceased)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) (Deceased)

Zhao Liu

Independent ( email )

No Address Available

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