Japan, for example, is buying US bonds and selling Yen on markets. The Bank of Japan sold ¥1 trillion (£7bn) just yesterday.(1) They hope by buying dollar assets, they will weaken the Yen against the dollar.
Japan has two main fears.
- Strong currency makes Japanese exports more expensive, leading to less demand and lower growth. Because Japan is seen as a relative 'safe haven' there is unexpectedly high demand for Japanese currency.
- Japan still has deflation (-1.5%). Deflation of course can lead to lower growth and debt deflation.
The problem is that the US doesn't want a stronger dollar either. The US fears an appreciation in the dollar will hurt US exports. The US is already dismayed at the perceived under valuation of the Chinese currency. This attempt to manipulate exchange rates is often called 'competitive devaluation' or beggar-thy-neighbour policies - because you seek to improve your prospects by making other countries less competitive.
Why is the Japanese Currency Rising? when -
- the economy is sluggish.
- The Central Bank is trying to pursue monetary stimulus
- Japanese Public Sector debt is over 200% of GDP
It may be that it is difficult to actually weaken the Yen, because the level of intervention may be too great given markets appetite for Japanese Yen
The problem is that the demand for Japanese Yen is not so much because of strong economic growth and good prospects in Japan, but because - well it isn't the US or Euro. Thus the Japanese Yen is rising at a time when their economy doesn't need it.
One thing is certain, countries like Japan need to avoid deflation. Weakening the currency and creating money is one way of dealing with it.