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The rapid decline of the Japanese yen — recently stabilized by a (presumed) round of intervention — has brought forth the usual “currency crisis” discussion from the usual suspects. I cannot say that I am following Japan closely right now (I used to in the now distant past), so I will just make a few generic points.

The yen is a floating currency, and no sector in Japan borrows in foreign currencies to any large extent. Historical currency crises are artefacts of managed exchange rate schemes or foreign borrowing.

Although I would prefer a more timely data source, the chart above from the IMF World Economic Outlook database shows Japan’s current account surplus. The Japanese private (and public) sector have accumulated a large amount of financial claims on the rest of the world. A drop in the value of the yen increases the value of those foreign currency assets. Sooner or later, if the yen gets stupidly cheap, repatriation looks interesting for Japanese savers.

Pretty much everyone wildly over-estimates the effect of exchange rate movements on domestic inflation. The price level in Japan (as measured by the CPI) has barely budged since the mid-1990s, while the yen has done any number of wacky things over that period.

Could Japanese government bond yields rise? Sure, why not? The problem with JGB doom stories is that most of those Japanese savers with foreign currency assets have implicit/explicit actuarial liabilities denominated in Japanese yen. Higher JGB yields are exactly what they want to see.

Although I am in no great position to understand why Japan intervened, the most likely reason was that they disliked how disorderly the previous decline was. Nobody in the private sector wants to catch a falling knife. But once the intervention takes out some of the weaker hands, it acts as a signal for other actors to start buying yen, creating a two-way market again.

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