A stronger yen, or a weaker dollar, is a drag on Japan's export-led economic recovery. Trying to stem the tide, the government often steps into currency markets on a massive scale. Market players, however, worry that these dollar-buying, yen-selling interventions could be putting the Japanese and U.S. economies on a dangerous path: A falling dollar, should it continue, would open a Pandora's box on both sides, with dire implications for the world economy.
The theory goes something like this: America's "twin deficits" -- in the federal government budget and in the current-account international payments balance (mostly the trade deficit) -- continue to mushroom as President George W. Bush's administration pushes ahead with aggressive economic stimulus measures, such as huge tax cuts. As a result, investors and traders are coming around increasingly to the view that the greenback is in for a further fall.
The twin deficits are already ballooning to an all-time record: roughly $500 billion a year each. Add to this the low savings rate, or the small reserve of surplus domestic funds, and there emerges a precarious picture of the world's largest economy growing on the back of borrowed foreign money. A large-scale flight of capital may choke off growth.