As the Japanese economy is battered by a recent rise of the yen against the U.S. dollar to a 15-year high, the Bank of Japan decided Monday to inject more liquidity — an additional ¥10 trillion at a low interest rate on top of the ¥20 trillion under the existing lending scheme — into the economy, while keeping the key interest rate at the current 0.1 percent. The government also decided on a framework of additional measures for spurring the economy.
The central bank hopes that the new step will help stimulate the economy and lower interest rates, thus applying a brake on the rise of the yen. But the BOJ and the government should not be distracted by optimism and must vigorously fight deflation. The strong yen is due to the prospect of long stagnation of the U.S. economy. Despite massive fiscal spending by the U.S. government after the 2008 financial crisis, housing sales and starts have plunged, retails are stagnant and unemployment is high.
The United States will not support the idea of the BOJ intervening in the currency market because the Obama administration is enforcing a policy of doubling U.S. exports to compensate for a decline in domestic demand.
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