There is something humorous, in a dark way, when a top Japanese official protests the yen's strength because, in his words, "it doesn't reflect fundamentals."
That is what Haruhiko Kuroda, vice finance minister of international affairs, said Friday. So if the yen is too strong, and it doesn't reflect fundamentals, then the fundamentals must be right in the dumpster. Presumably Kuroda would be happier if investors regarded the yen as death warmed over.
Actually, Japan is in a quandary about the yen from several points of view. I shouldn't put words in their mouths, but I imagine that Japanese officialdom would be quite happy if the yen plunged 20 or 30 percent.
The problem with that is that the rest of Asia is in bad shape. Japan would be accused of having engineered yen depreciation to grab export markets from the rest of Asia.
Though Japan may feel constrained against seeking a lower yen outright, it has no such self-imposed restraint when it comes to railing against the yen when the currency strengthens. The playbook calls for silence when the yen weakens and loud protests when it strengthens.
Anyway, the Japanese have a bee in their bonnets about the yen's strength. So we can anticipate threats of central bank intervention and get ready for the usual debate about sterilized versus nonsterilized intervention. That is where the world loses patience with the Bank of Japan and the Japanese Ministry of Finance. For if Japan really wants to weaken the yen, or at least cap its rise, it can use nonsterilized intervention.
This term means that the central bank, after buying dollars (or euros) with yen, undertakes no operation to neutralize the impact on the money supply.
Normally, when a central bank sells its own currency during intervention, the base of the money supply rises.
To sterilize such an intervention, the central bank makes a second transaction of selling domestic assets, such as government bonds. This removes the newly created liquidity that came about from the foreign-exchange intervention.
For the most part, Japan has had a history of sterilizing foreign-exchange interventions.
I have always wondered whether Japan's sterilizing of interventions is motivated by deliberate policy considerations or by ministerial turf wars.
As is the case in many countries, it is the Japanese Ministry of Finance that calls for foreign-exchange intervention. The central bank conducts the intervention from its trading desks -- but it is the ministry that pulls the trigger.
Say that the ministry tells the central bank to buy US$2 billion versus yen. That means the base money supply will rise by that amount in the first instance.
And that's where the problem lies. For it is the central bank, not the ministry, that is in charge of monetary policy.
Yet if the central bank doesn't sterilize the intervention it will have abdicated responsibility for monetary policy to the ministry.
To put it another way, the fact that there is a debate about sterilized and nonsterilized intervention indicates that the central bank and the ministry are at odds on an important policy issue.
But whether these two powerful institutions agree or disagree on how to conduct international policy, they ought to learn that nothing good comes from threatening and bullying the foreign-exchange market.
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