Subsequent events showed, however, how tentative the effect conveyed simply by words can be. Traders speculated that, with negative German economic news pushing the Deutsche mark down against the dollar, the yen simply was going along for the ride. If G-7 officials are serious about currency stabilization, the next step would be intervention in currency markets. Japan, the United States and other nations can create an artificial demand for yen in foreign exchange markets by selling dollars for yen. Tokyo, in particular, would find such a course of action relatively easy inasmuch as it has among the world's largest foreign exchange reserves, mostly dollars, in part a consequence of past currency actions in which the Bank of Japan bought dollars and sold yen in an effort to prevent a run-up in the value of the Japanese currency.
Economists regard talk and even currency intervention as essentially cosmetic measures, however.
As noted, the yen's weakness is rooted at least in part in pending Japanese fiscal policy moves. A full-fledged defense of the yen would involve either altering that stance or else taking alternative macroeconomic measures, the most obvious of which would be to boost interest rates. More likely, they hoped that smoke and mirrors in the form of vague statements and possible currency intervention would be sufficient, at a minimum, to stem the yen's decline, if not reverse it. The views expressed in this report are those of the author and do not necessarily represent those of the Japan Economic Institute.