Japan is the only industrialized nation to have undertaken quantitative ease, the notion of flooding the banking system with excess reserves by buying bonds, as far as I know. Until yesterday.
The US government undertook that course of action yesterday with its plan to buy $600 bln in mortgage-backed securities and Freddie and Fannie debt. This action lowered long-term rates and mortgage rates in particular. Some see much more to go in this regard, taking 10-year yields down another 100 bp from the 3% level where they stand at the moment.
What are the implications for the currency. Looking back in history, the JPY weaken modestly as the policy unfolded. It was almost a year after the policy was enacted before the yen weakened substantially (to the mid-130s for a few weeks. The policy shift did not take place in a vacuum, to be sure. During the period studied we experienced the 9/11 terrorist attacks, the run-up to the Iraq war, unsterilized intervention on the part of the BOJ..
While the yen did weaken for a period following the move to quantitative ease, it was far from a one way street. The Chicken-Littles on CNBC and elsewhere would have you believe the dollar is on the cusp of imminent collapse. Rarely are currency moves that easy to forecast, so we would take the easy pronouncements tossed out on the tube with a big grain of salt.
Does printing money weaken a currency? Probably, in the short-term. But deflation tends to strengthen a currency. That’s the battle that is now underway. In a world flooded with debt, deflation is the worst possible enemy. That’s why the Fed has thrown caution to the wind and cranked up the printing presses.
