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Bernanke's Case for a Weaker Yen

Wednesday, 21 Nov 2012 | 3:24 PM ET
CNBC

Did you hear? Fed Chairman Ben Bernanke is advocating a weaker yen.

OK, not exactly. But a sampling of his remarks in a speech he wrote in 1999 make a powerful case for the potential positive impact of a weaker yen on Japan's economy, and for why yen inaction would be so wrong.

Alan Ruskin, global head of G10 foreign exchange strategy at Deutsche Bank, cites the speech in a recent note to clients and concludes that the comments "both summarize the case for deliberately weakening the yen and provide an outline for refuting the arguments usually used for why Japan cannot pursue such policies."

Here are the excerpts Ruskin pulled together, and a link to the whole speech.

"As I will discuss, I believe that a policy of aggressive depreciation of the yen would by itself probably suffice to get the Japanese economy moving again. I agree with the recommendations of Meltzer and McCallum that the BOJ should attempt to achieve substantial depreciation of the yen, ideally through large open-market sales of yen. Through its effects on import-price inflation, on the demand for Japanese goods, and on expectations, a significant yen depreciation would go a long way toward jump-starting the reflationary process in Japan. The "political constraints" argument is that, even if depreciation is possible, any expansion thus achieved will be at the expense of trading partners—-a so-called "beggar-thy-neighbor" policy. Defenders of inaction on the yen claim that a large yen depreciation would therefore create serious international tensions. Perhaps not all those who cite the "beggar-thy-neighbor" thesis are aware that it had its origins in the Great Depression, when it was used as an argument against the very devaluations that ultimately proved crucial to world economic recovery. The important question, of course, is whether a determined Bank of Japan would be able to depreciate the yen. I am not aware of any previous historical episode, including the periods of very low interest rates of the 1930s, in which a central bank has been unable to devalue its currency."

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