G-7 agreed on selling the yen on Thursday night to prevent the Japanese currency from appreciation and help its domestic economy to recover after the natural disaster. The solidarity of the U.S., Japan, U.K., Canada, France, Germany and Italy and the nation’s prompt response to the critical situation is respectful, however let’s view the scenarios and outcomes of such intervention.
After the sharp decline of Japanese stock markets Japan threw trillions of yen into the markets to keep financial markets functioning. These monetary actions treated as financial stability measures are based on businesses self-support expectations. While Japan’s production is competitive and exchange rate is favorable to sell produced goods in foreign markets, it is likely that export industries will keep operating and even increase their production. Those desirable outcomes are well understood as one of the most important things for Japan is to master the rise of unemployment and place people those lost their jobs during the disaster.
On the other hand, additional sales of yen by G-7 central banks should support the devaluation of yen. However, what are the long term implications of this policy?
During a couple of years we saw the financial crises in US, Europe and now in Japan. The reasons of financial instability are different but one thing is common to all crisis management - monetary policy actions are just a short term relief. The increase of money supply which is used to keep financial stability and boost recovery most likely will have negative implications in the future. Uncontrollable money spread in to the markets may not reach those who really need financial support and directly contribute to the recovery. Moreover, excessive money amount in the markets boost inflation.
Thus, from my point of view, the G-7’s purchase of Japan’s government bonds and Japanese targeted subsidies to restore the outcomes of disasters would be a better decision.
