Continued weakening of the Japanese economy and the yen prompt China to devalue, sending Asia into another round of competitive currency devaluations that make the turmoil last fall look like small change. The financial shockwaves stretch from the embattled markets in Russia to the Latin American economies to the financial markets here at home. No wonder, then, that Washington intervened in the currency markets this week to prop up the yen before any such scenario unfolds. Lawrence Summers, deputy treasury secretary, and William McDonough, New York Fed president, have been deployed to stress the urgency of taking on the failing banking system. Unemployment and bankruptcies are growing quickly.
Domestic demand is flat, and efforts by the government to stimulate demand have been unsuccessful.
Before the intervention, the yen plummeted to over 147 to the dollar an eight-year low. So are the Japanese demographics. The aging population is more interested in saving than in consuming. That is an understatement. It remains to be seen what effect Hashimoto's announcement on bad debt will generate.