Japan is holding a mountain of US dollars. The Finance Minstry in Tokyo reported that Japan's foreign exchange reserves rose to an all-time high of 908.96 billion dollars at the end of March from the previous record of 905.05 billion dollars in February. Japan's large foreign exchange reserves are the result of years of currency intervention by the government to keep the yen down against the dollar and help exporters stay competitive. In other words, the Japanese have kept the Yen artiificially low so that they could flood US markets with cheap goods.
However, the Japanese are not the only ones playing this game. Japan’s foreign exchange reserves are the second largest in the world, after China, whose holdings reached 1.07 trillion dollars at the end of 2006.
Deflation is not yet beaten in Japan. After ten months of mild inflation, consumer prices fell 0.2 percent in February. The data was particularly bad news for the Japanese central bank, who had been trying to raise interest rates and after several years of free credit, restore monetary policy to something closer to normality. Unfortunately, February’s data suggests that the recent interest rates hike was premature.
Japan continues to act as a warning to others about the dangers of speculative bubbles. The long cold winter of deflation followed on from an extraordinary asset bubble from the late 1980s. Speculation was quickly followed by a recession, a banking crisis and higher unemployment. The government’s repeated attempts to kick start the economy with higher fiscal expenditure have largely failed and led to rising public sector indebtedness.
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