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Kan takes up the deflation fight

Read more on:    Kan's Government | Tadao Noda | Bank Of Japan
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Japan: Currency interventions are generally seen as unwise props for weakness or beggar-my-neighbour treatments for strength. But Japan's first intervention in six years to weaken the yen is more about tackling persistent deflation and stagnation in the world's third biggest economy and is therefore welcome.

The move came the day after premier Naoto Kan survived a leadership challenge. The ministry of finance sold yen and bought dollars to weaken Japan's currency. But also appears to be shoving the sluggish towards action. , a BoJ board member, intimated in a meeting with businessmen that the bank was unlikely to "sterilise" the finance ministry's yen sales - mopping it up with issuance of short-term bills - but would let the move add liquidity. Noda also talked of decisive policy measures to combat deflation. This may reflect new-found urgency within the BoJ to address the threat.

The heightened political pressure on the independent BoJ itself reflects the pressure Kan has felt. Ichiro Ozawa's challenge to his leadership was unsuccessful but revealed a camp in the ruling Democratic Party that demands Kan do more to reactivate the economy.

The intervention has worked initially. The yen has dropped by about three per cent against the US dollar, from below ¥83 to over ¥85 per dollar in trading on Wednesday. The Nikkei rejoiced, rising 2.3 per cent. Japan’s investors welcome the weaker currency because it helps exporters. But the weaker yen's more legitimate goal is to push up the prices of imported goods such as commodities, helping to lift inflation, which is currently a negative 0.9 per cent. When prices are falling, even minimal interest rates aren't low, which is why deflation can be a downward spiral.

The risks with interventions are many. They may just give speculators a juicy target. And an important policy question is whether the BoJ will follow up in October with policies that add to monetary easing, pushing money into riskier assets and out of the yen.

But Kan's action is preferable to accepting deflation. Japan must try to tackle its economic weakness — other than with more government building of bridges to nowhere.

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