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The Yen

The Japanese Yen has depreciated sharply through 2001against the US dollar.The currency hit its lowest level in over three years against the dollar pushing above ?135 in late January.Japan is a recession-hit economy suffering from weak demand, falling consumer spending and accelerating deflation.With Japan’s deepening economic woes there is a bleak outlook for the strength of the Yen for 2002 and 2003.
Currently Prime Minister Koizumi and the Japanese government are about to release an economic reform plan directed at Japanese bank bad loans, unemployment and monetary policy.
Major Japanese banks currently have massive bad loans.Koizumi has to decide on whether public money should be used to help clean them up or leave them to themselves to put own financial houses in order.Injecting public money would help stabilize the financial institutions and financial climate in Japan.Koizumi is reluctant of this course of action because it would be unpopular with taxpayers/voters.
Japan a country known for its lifetime employment system is now experiencing high unemployment rate around 5% well above the traditional rate.This issue as well is causing considerable political problems for Koizumi.This situation will not improve till the economy improves making decisions for Koizumi even more political.
Since Japanese inflation fell below zero percent three years ago, increasing monetary stimulus has failed to work.The current government wants the BoJ to ease monetary policy further by increasing outright Japan Government Bonds purchases.The BoJ has already thrusted vast amounts of liquidity into the financial system with little success.The banks don;t want to lend, trying to secure their reserves and only companies deep in debt want to borrow.
The BoJ is now warning of the dangers of deflation and has said a weak yen alone cannot stop it. The BoJ can only stimulate demand by ensuring inflation wil…

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